Reps & Warranties Insurance: Protecting Both Buyers and Sellers in M&A

When a loss is experienced by a buyer of a company, the repercussions can be costly — both for the buyer as well as, potentially, for the seller. For the buyer, there may be a challenge in recovering losses, while the seller may be at risk of having to pay back a portion of the purchase price. But there is a way to protect both the buyers and the sellers from incurring a financial loss — representations and warranties insurance (RWI).

In fact, RWI has become a go-to tool in bridging negotiation gaps in private equity transactions.

So What, Exactly, Is RWI?

RWI is a type of insurance that can adhere to either the buyer or seller in an M&A transaction, and protects them against breaches of the representations and warranties. In fact, RWI may even reduce, or eliminate, the need for escrows or purchase price holdbacks and indemnity retention limits. The result is a far more expedient and streamlined M&A transaction.

While RWI may not be the perfect fit for every deal, it’s something that every middle-market M&A seller, buyer, and advisor should consider.

What to Know About RWI

A typical RWI policy will include the following terms:

• Premiums from 2–5 percent of the limit of liability purchased
• Limits of up to $50 million for one transaction
• Deductibles ranging between 1–3 percent of the transaction value

Buyers may also be able to recover losses without having to pursue remedies against the seller. Sell-side policies won’t protect against seller fraud, but could possibly provide third-party coverage (for example, losses asserted by the buyer).

A Good Option for PE Buyers Looking for Protection

It’s becoming more and more common for sellers to offer PE buyers no (or very little) seller indemnity. This shift is a result of a demand for good acquisitions exceeding supply. In these instances, RWI might offer a level of protection while still allowing PE buyers to make their purchase offer competitive.

RWI can also be an asset to PE buyers because it can offer a longer protection period than what is typically obtained from sellers. Furthermore, RWI provides coverage limits that aren’t necessarily tied into a percentage of the purchase price. This allows the buyer to get more coverage than what would typically be offered from the seller.

With so many benefits tied directly into M&A transactions, RWI is certainly something worth considering for both buyer and seller.

How RWI Fits Into the Broader M&A Risk Framework

Representations and warranties in a purchase agreement are affirmations made by the seller about the state of the business — its financials, legal standing, employee matters, contracts, environmental compliance, and more. If those representations turn out to be inaccurate after closing, the buyer has been damaged. Traditionally, the remedy was to pursue the seller directly under an indemnification clause, often backed by an escrow holdback from the purchase price.

RWI shifts that dynamic. Rather than relying on the seller’s willingness or ability to fund an indemnity claim, the buyer submits the claim to an insurer. This is particularly valuable in competitive auction processes, where sellers routinely resist large escrows as a condition of closing. Buyers who can credibly offer a clean indemnity package — because they’ve secured RWI — often gain a meaningful edge.

For teams coordinating the full range of closing mechanics, the deal closing checklist is a practical resource for tracking representations, warranties, and indemnification terms alongside all other pre-closing conditions. Those evaluating the reps and warranties framework itself should also read the companion article on reps and warranties for buying and selling businesses.

Underwriting Process and Common Exclusions

Obtaining RWI is not as simple as calling an insurer and filling out a form. Underwriters conduct their own abbreviated diligence on the transaction — reviewing the purchase agreement, the disclosure schedules, and the buyer’s diligence findings before issuing a policy. Common exclusions from RWI coverage include:

• Known breaches (items the buyer discovered during diligence and accepted)
• Forward-looking projections and forecasts
• Seller fraud (on the sell-side policy)
• Pension underfunding in certain markets
• Transfer-pricing and certain tax matters

Because the underwriting process requires access to transaction documents, teams using transaction document analysis tools can accelerate the information-sharing process and reduce the back-and-forth with insurers.

When RWI Makes the Most Sense

RWI is best suited to transactions where the gap between buyer and seller indemnification expectations is creating deal friction, where the seller is a financial sponsor exiting a fund (and needs a clean break), or where a buyer wants extended coverage beyond the typical 12–24-month indemnification window. It is less commonly used in very small transactions where the premium cost represents a disproportionate share of deal value, or where the representations are too thin to satisfy an underwriter.

For buyers structuring competitive offers, pairing RWI with a strong buy-side support process — including thorough diligence — is the most effective approach. Insurers reward buyers who demonstrate they’ve looked hard at the business, because a well-documented diligence file limits the risk of surprise claims. Sellers concerned about ongoing exposure after closing should also consider how RWI interacts with the broader set of risk reduction strategies available to business owners.

Frequently Asked Questions

Can both the buyer and seller hold an RWI policy on the same transaction?

In most cases, only one policy is used — either a buy-side policy taken out by the buyer, or a sell-side policy arranged by the seller. Buy-side policies are more common today because they allow the buyer to recover directly from the insurer without having to litigate against the seller. In some larger or more complex transactions, both parties may carry separate policies covering different risks, but this is less typical.

Does RWI eliminate the need for an escrow entirely?

Not always, but it can significantly reduce or replace escrow requirements. Insurers typically require the buyer to retain a deductible (often called a retention or basket) that functions similarly to a small escrow. However, because the majority of indemnification exposure shifts to the insurer, sellers are often able to walk away from closing with a much larger percentage of the purchase price in hand than they would under a traditional escrow arrangement.

How long does it take to obtain RWI coverage?

In a competitive auction environment, underwriters have become adept at moving quickly — policies can sometimes be bound in five to seven business days once the underwriter receives the purchase agreement and diligence materials. Early engagement with a broker is advisable; waiting until the week before signing can compress timelines and limit the buyer’s negotiating position with the insurer.

Is RWI available for smaller transactions?

Coverage is available across a wide range of deal sizes, though the economics improve as transaction value increases. On smaller deals, the premium and underwriting costs represent a larger share of the overall transaction, which can make the coverage less cost-effective. A transaction advisory team can help assess whether RWI makes financial sense for a given deal. To discuss your specific situation, speak with an advisor.