Representations and warranties insurance (R&W insurance, RWI; "W&I" in Europe) is an insurance policy that covers losses from breaches of the seller's representations and warranties in a definitive agreement. Instead of the buyer recovering from the seller through an indemnification escrow, the buyer recovers from an insurer. Over the 2010s and 2020s it moved from exotic to standard in middle-market and larger private deals.
How it works
- Buy-side policy (most common). The buyer is the insured. If it discovers a breach of the seller's reps after closing, it claims against the insurer rather than the seller. This lets the seller achieve a cleaner exit with little or no escrow and minimal post-closing liability.
- Sell-side policy (less common). Insures the seller against its own indemnification obligations.
Typical economics
- Coverage limit: often ~10% of enterprise value, sized to the parties' risk appetite.
- Retention / deductible: a "retention" (akin to a deductible) of roughly 0.5%–1% of enterprise value, frequently shared via a small escrow and stepping down after a period. Losses below the retention are not covered.
- Premium: a one-time premium of roughly 2%–4% of the coverage limit (i.e., a few tenths of a percent of deal value), plus underwriting fees and insurance taxes.
- Term: commonly 3 years for general reps and 6 years for fundamental and tax reps.
Why it has become standard
R&W insurance reallocates a problem both sides dislike — post-closing indemnity exposure — onto a third party, which benefits everyone:
- Sellers get a near-"walkaway" deal: more cash at close, a smaller or zero escrow, and limited lingering liability — especially valuable for PE funds that want to distribute proceeds and wind up a fund.
- Buyers get a solvent, creditworthy counterparty (the insurer) to claim against instead of chasing dispersed or departed sellers, and the tool can make a bid more competitive by offering sellers a cleaner exit.
- It can bridge gaps in indemnity negotiations, smoothing deals that might otherwise stall on liability terms.
Limits and exclusions
R&W insurance is not a cure-all. Policies exclude known issues (matters the buyer's diligence surfaced), purchase-price adjustments like the working-capital true-up, and often specific risks (certain tax positions, environmental, wage-and-hour, pensions). Insurers underwrite the deal and require thorough diligence — a quality QoE and legal review — before binding, because they are pricing the residual risk that diligence did not find. Known problems still need a traditional escrow, holdback or specific indemnity.
Where it is used
R&W insurance is now common in private deals above roughly $20–30M and near-universal in larger sponsor-led transactions. In smaller deals, the premium and diligence cost can outweigh the benefit, and a conventional escrow remains the norm.
See also
- Indemnification — The contractual mechanism by which the seller compensates the buyer (or vice versa) for losses resulting from breaches of representations, warranties or covenants in the definitive agreement.
- Escrow — A portion of the purchase price held by a neutral third party for a specified period after closing. Acts as a ready source of funds to satisfy the seller's indemnification obligations.
- Holdback — Purchase-price consideration that the buyer retains rather than pays out at closing, to be released later subject to conditions. Function is similar to an escrow but with the buyer (not a third party) holding the funds.
- Due diligence — The structured investigation a buyer conducts on a target between LOI and closing — covering financial, legal, tax, commercial, operational, IT, HR and environmental workstreams — to verify the seller’s claims, find risks and shape final price and deal terms.
- Definitive purchase agreement — The binding contract that governs an acquisition and its terms.
- Material adverse change clause — A provision allowing the buyer to walk from the deal between signing and closing if the target suffers a major, durationally significant adverse change. Heavily negotiated and rarely successfully invoked.