Representations and Warranties Insurance in M&A

Quick answer

Representations and warranties (R&W) insurance transfers the risk of seller's breaches of representations from the purchase agreement's indemnification provisions to a third-party insurer. Buyer-side policies are most common (90%+ of policies). Coverage typically runs 3–6 years, with premiums of 2–4% of policy limits. PwC reports that R&W insurance is now used in over 50% of middle-market PE deals, enabling cleaner exits for sellers (minimal escrow) while protecting buyers against unknown liabilities. Key exclusions: known issues identified during DD, forward-looking projections, and certain tax items.

R&W insurance has transformed M&A deal mechanics. What was once a niche product is now standard in middle-market PE deals — used in over 50% of transactions.

How R&W Insurance Works

The Problem It Solves

• Seller makes representations — "The financial statements are accurate," "There is no undisclosed litigation," "The company complies with all laws"
• Buyer discovers a breach post-close — Financial statements contained material errors
• Buyer seeks indemnification — Claims against the seller per the purchase agreement
• Seller resists — Disputes, litigation, delays, potential inability to pay

R&W insurance replaces this adversarial dynamic with an insurance claim.

Buyer-Side vs. Seller-Side Policies

• Buyer is the insured party and makes claims directly against the insurer
• Seller provides minimal or no indemnification (clean exit)
• Buyer gets faster, more certain recovery
• Seller avoids post-close liability

• Seller is the insured party
• Insurer backstops seller's indemnification obligations
• Less popular because buyer still must pursue the seller first

Policy Economics

Premium

Premiums run 2–4% of policy limits:

Retention (Deductible)

• Typically 1% of enterprise value
• Often steps down to 0.5% after 12–18 months
• Shared between buyer retention and seller indemnification in some structures

Coverage Period

• General representations: 3 years
• Fundamental representations (title, authority, capitalization): 6 years
• Tax representations: Duration of applicable statute of limitations

What R&W Insurance Covers

• Undisclosed liabilities not identified during DD
• Inaccurate financial statements (unknown errors)
• Undisclosed pending or threatened litigation
• IP ownership defects (unknown assignment gaps)
• Tax positions that prove incorrect post-close
• Regulatory non-compliance not identified during DD
• Environmental liabilities (with enhanced coverage endorsement)
• Employee benefit plan deficiencies

What R&W Insurance Excludes

• Known issues identified during DD and disclosed in the disclosure schedules
• Forward-looking projections, forecasts, and estimates
• Purchase price adjustments (NWC true-ups — covered by the PA mechanism)
• Consequential and punitive damages (unless specifically endorsed)
• Fraud by the insured party
• Certain transfer pricing and net operating loss items

Key principle: R&W insurance covers *unknown* unknowns discovered post-close. It does not cover known issues that the buyer accepted during DD.

The DD Connection

R&W insurers conduct their own underwriting diligence:

1. 1. Review the buyer's DD reports — QoE, legal DD, tax DD, environmental
2. 2. Assess DD quality — More thorough DD = better coverage terms
3. 3. Identify coverage gaps — Issues where DD was insufficient may be excluded
4. 4. Underwriting call — 1–2 hour call with the deal team to discuss DD scope and findings

Critical insight: The quality of the buyer's DD directly affects R&W insurance terms. Thorough DD leads to broader coverage and fewer exclusions.

The Bottom Line

R&W insurance is not a substitute for DD — it is a complement. Thorough DD identifies known issues (negotiated into the purchase agreement). R&W insurance protects against unknown issues discovered post-close. Together, they create a comprehensive risk management framework for M&A transactions.

Sources cited

1. PwC, '2024 M&A Outlook,' 2024
2. Bloomberg Law, 'Post-Closing Disputes in M&A,' 2023

Author

Sorai Editorial

Editorial review team for Sorai's public diligence content

The editorial team translates public primary-source research and Sorai's workflow perspective into material designed for private equity, corporate development, and transaction advisory readers.

What is R&W insurance in M&A?

R&W insurance is a policy that covers losses arising from breaches of the seller's representations and warranties in the purchase agreement. Buyer-side policies (most common) allow the buyer to make claims directly against the insurer rather than pursuing the seller for indemnification.

How much does R&W insurance cost?

Premiums typically run 2–4% of policy limits. For a $10M policy, expect $200K–$400K in premium. Retention (deductible) is typically 1% of enterprise value, often stepping down to 0.5% after 12–18 months. Underwriting takes 2–3 weeks.

What does R&W insurance cover?

R&W insurance covers losses from unknown breaches of representations: undisclosed liabilities, inaccurate financial statements, undisclosed litigation, IP ownership defects, tax positions that prove incorrect, and regulatory non-compliance not identified during DD.

What does R&W insurance exclude?

Standard exclusions: known issues identified during DD and disclosed in the purchase agreement, forward-looking projections and estimates, specific environmental liabilities (may require separate environmental policy), certain transfer pricing and intercompany tax issues, and fraud by the insured party.

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