Representations and Warranties Insurance (RWI)
An insurance product covering breaches of representations and warranties in M&A transactions, transferring risk from seller (escrow/holdback) or buyer (direct claims) to an insurer. Buy-side RWI (most common) protects the buyer against losses from breach of seller's reps. Reduces or eliminates traditional escrows and survival periods, smoothing transactions and providing cleaner exits for sellers. Standard in middle-market and larger M&A; available in lower-mid-market through specialized programs.
Representations and Warranties Insurance (RWI) is an insurance product covering breaches of representations and warranties in M&A transactions. RWI transfers risk from the parties (typically held by sellers via escrow/holdback or by buyers via direct claims) to an insurer. The product has expanded dramatically since the early 2010s, once a niche tool, RWI is now standard in middle-market and larger M&A, and increasingly available in lower-mid-market deals. Buy-side RWI (most common) protects the buyer against losses from breach of seller's reps; sell-side RWI (less common) protects the seller against indemnification claims.
Buy-side RWI structure
Buy-side RWI is the most common structure (90%+ of RWI in current market). Standard structure: (1) insured, buyer (and typically buyer's affiliates); (2) covered persons, the buyer's claims for breach of representations and warranties in the purchase agreement; (3) policy limits, typically 10-30% of transaction value; (4) retention, typically 0.5-1% of transaction value, often dropping to 0.25-0.5% after 12 months; (5) policy period, 3 years for general reps, 6+ years for fundamental reps and tax; (6) premium, typically 2-4% of policy limit; varies by industry, deal size, and risk profile.
Sell-side RWI structure
Sell-side RWI (less common, ~10% of market) protects the seller against indemnification claims under the purchase agreement. Sell-side is most useful where the buyer insists on substantial indemnification but the seller wants to receive sale proceeds without holdback. Sell-side covers the seller for indemnification payments to the buyer, effectively converting the buyer's claim against seller into a claim against the seller's insurer. Sell-side coverage excludes seller's actual knowledge or fraud (standard) and does not cover intentional misrepresentation. Sell-side is more expensive than buy-side because of moral hazard concerns.
Deal benefits
RWI provides multiple deal benefits: (1) reduced or eliminated escrow, RWI replaces or substantially reduces traditional 10-15% indemnification escrows; (2) cleaner seller exit, sellers receive more proceeds at closing without indemnification overhang; (3) simplified survival, RWI provides longer effective survival than typical 12-18 month seller indemnification; (4) buyer protection against insolvent sellers, particularly valuable for distressed-seller acquisitions; (5) smoothed negotiation, RWI removes a significant negotiation friction point (indemnification scope and survival); (6) private equity fund considerations, particularly valuable for PE sellers wanting to close funds and distribute proceeds.
Standard exclusions
Standard RWI exclusions (varying by carrier): (1) known issues, matters disclosed in the data room or specifically known; (2) specific identified matters, disclosed risks identified during underwriting; (3) covenants and other agreements, RWI covers reps and warranties only, not covenants, indemnities, or other agreements; (4) purchase price adjustments, working capital, NWC adjustments handled separately; (5) certain tax matters, pre-closing tax indemnification typically excluded (though tax insurance available separately); (6) environmental beyond scope, environmental reps may be sublimited or excluded; (7) forward-looking statements, projections and forecasts; (8) specific industry risks, sector-specific exclusions for high-risk industries (cannabis, crypto, certain regulated businesses); (9) fraud, actual fraud excluded.
Underwriting process
RWI underwriting requires substantial diligence: (1) application and information, broker submits application, financial information, transaction documents; (2) underwriting call, initial discussion with carrier on deal structure and risks; (3) diligence review, carrier reviews buyer's diligence reports, data room, transaction documents; (4) underwriting questions, written follow-up on identified issues; (5) policy negotiation, exclusions, retention, limits, definitions; (6) binding, coverage typically bound at signing or before closing. Typical timeline: 2-4 weeks from initial submission to bound coverage. Quality underwriting requires comprehensive diligence, RWI is not a substitute for diligence but a complement that prices residual risk.
Claims process
RWI claims process: (1) claim notification, insured notifies carrier of potential claim; (2) claim documentation, facts of breach, calculation of damages; (3) carrier investigation, carrier reviews claim and underlying issues; (4) defense or settlement, for third-party claims, carrier may control defense; for direct loss claims, carrier evaluates and pays. Typical claim timeline: 6-18 months for resolution. Claim payments tend to cluster in specific categories: financial statement reps, tax reps, compliance, intellectual property, employment. Industry data shows ~20% of policies have at least one claim notification.
Coordination with traditional indemnification
RWI coordinates with traditional purchase agreement indemnification: (1) RWI as primary, buyer claims first proceed against insurer; (2) seller indemnification as backstop, typically below RWI retention or for excluded items; (3) fundamental reps, often have separate seller indemnification regardless of RWI (capped at purchase price for fundamentals); (4) specific indemnification, pre-closing taxes, identified litigation, regulatory matters often handled by direct seller indemnification; (5) fraud carve-out, sellers remain liable for fraud regardless of RWI. Sophisticated transaction documents coordinate RWI with tailored indemnification to address all risk categories.
For Texas M&A transactions in the middle market and above, RWI is increasingly standard. Best practice: (1) for buyers, engage RWI broker early in diligence, at least 2-3 weeks before signing; (2) for sellers, evaluate RWI economics, typical breakeven is 0.5-1% of deal value in retained risk; (3) coordinate RWI with traditional indemnification, RWI replaces but does not eliminate need for tailored indemnification on specific risks; (4) negotiate exclusions carefully, broad exclusions defeat coverage; (5) maintain comprehensive diligence quality, underwriting depends on diligence; (6) consider tax insurance separately for material tax issues; (7) document underwriting communications carefully, claims defense often turns on what was disclosed during underwriting. Common gaps: parties assume RWI covers everything in the purchase agreement and reduce indemnification accordingly, leaving uncovered exposure on covenants, specific risks, and forward-looking matters. RWI is part of a comprehensive risk allocation, not a complete substitute.