Understanding Representation & Warranty Insurance in M&A Transactions

August 28, 2025  |  By

In a mergers and acquisitions (M&A) transaction, one of the biggest concerns for both buyers and sellers is risk. What happens if there is a problem with the company that was not disclosed, a discrepancy found on the financials, or a hidden tax liability? This is where Representation and Warranty Insurance (RWI) comes into play.

Although once considered a tool for large, complex transactions, RWI is becoming more common in mid-market transactions. It is beginning to show up in lower middle market transactions as well. If you are considering either buying or selling a business, understanding what RWI does and does not cover can help you structure a cleaner, less contentious transaction.

What exactly is RWI?

Representation and Warranty Insurance is an insurance policy that covers losses stemming from unintentional breaches of the representations and warranties made in an M&A purchase agreement. It can be purchased by either the buyer or the seller, and is typically used to backstop the indemnification provisions in the transaction. Let’s break this down:

  • Representations: Assertions as to a fact, true on the date the representation is made, that is given to induce another party to enter into a contract or take some other action (e.g., “the company has no outstanding lawsuits”)
  • Warranties: A promise of indemnity if the assertion is false
    • If a representation is not true it is “inaccurate.” 
    • If a warranty is not true it is “breached.”
  • Breach: Occurs when a representation turns out to be inaccurate – regardless of either party’s intent

In a purchase agreement, representations and warranties are often listed together in one or more sections applicable to the seller/owner parties and usually one section applicable to the buyer. RWI does not replace good due diligence, but it can provide a financial safety net if something slips through the cracks.

Why Use RWI?

Advantages for Buyers:

  • Avoids the awkwardness of suing the seller(s) – especially if the sellers will be joining the team post-sale
  • Avoids dealing with recovery from multiple sellers
  • Helps in competitive bid situations by offering a “cleaner” offer
  • Often provides longer survival periods and greater coverage than traditional indemnification

Advantages for Sellers:

  • Reduces or eliminates the need for an escrow
  • Helps sellers distribute proceeds faster (no lingering liabilities)
  • Makes auction processes smoother
  • Eases friction between selling founders and buyer-side leadership

In other words, RWI reduces the “what-ifs” and helps everyone walk away from the transaction a little less anxious.

RWI Basics: Coverage, Cost & Exclusions

Note that these are generalizations and will vary depending on carrier, industry, and specific transaction.

  • Policy Limits: Usually 10% of transaction value (sometimes up to 20%)
  • Premiums: Typically 2%-4% of the policy limit (e.g., for a $10 million policy, expect $200K-$400K in premiums)
  • Deductibles: Typically 1%-2% of transaction value; who pays it is negotiable (e.g., for a $100 million transaction; the deductible might be $1-2 million
  • Duration: Three years for general representations and warranties, six years for fundamental representations (e.g., title, authority to sell, etc.)

However, it is just as important to understand what RWI does not cover. Common exclusions include:

  • Known issues or anything discovered pre-closing
  • Forward-looking statements or projections
  • Purchase price adjustments
  • Breaches of covenants (not representations)
  • Special categories depending on the transaction – think cybersecurity, tax, environmental, or industry-specific risks (e.g., Medicare billing for healthcare businesses)

To summarize, if something is too risky for the insurance carrier or already flagged in diligence, it most likely will not be covered by RWI.

RWI Application Process

Here is a simplified view of how RWI is secured for a transaction:

  1. The party applying for the insurance (usually the buyer, but not always) receives a non-binding indication of interest from an insurance company.
  2. The underwriting process begins – this involves both buyer and seller teams and comes with an upfront underwriting fee (often $25,000-$35,000+).
  3. Once diligence wraps up, the parties negotiate the policy and bind coverage at closing.

RWI insurance diligence is typically very thorough, but can be completed in line with other parts of the transaction timeline, if kicked off early in the transaction process. The insurer will expect to review diligence materials, the purchase agreement, and meet with buyer/seller teams to understand the risks involved. But if the buyer and/or seller waits until the last minute to start the RWI process, obtaining RWI insurance could delay the potential closing date, in some circumstances. RWI is particularly popular for private equity sellers, who are looking for a “clean” exit from a past transaction.

Are There RWI Alternatives?

RWI is not always the best or most cost-effective option – especially for smaller transactions (generally below $20,000,000, although that is shifting as the industry evolves).

Alternatives to RWI include:

  • Tail Insurance: Covers claims made after the seller’s insurance policies have expired or been canceled, but only for incidents that occurred while the policy was active (e.g., extends existing insurance held by the seller for a period post-closing)
  • Holdbacks or Escrows: Function as risk mitigation mechanisms, primarily protecting the buyer from potential financial losses arising from post-closing issues such as breaches of representations and warranties or undisclosed liabilities (classic but less seller-friendly)
  • Other specialized insurance products depending on the nature of the risk

Final Thoughts

RWI is not a one-size-fits-all solution – but when it works, it can significantly reduce friction on both sides of a transaction. It offers buyers peace of mind and sellers a clean exit. That said, it is not a panacea. RWI needs to be thoughtfully structured, and parties should go in with a clear understanding of what it covers (and does not), how it is priced, and when it actually makes sense.

If you are working on a M&A transaction – especially one that is fast moving or involves multiple parties – it is worth exploring whether RWI could help streamline negotiations, minimize risk, and get you to the closing table with fewer surprises. And as always, it is best to have advisors who know how to help you navigate the fine print.

Candace would like to thank VW law clerk, Emily Keller, for her help with this blog.

Posted in: M&A

About the Author(s)

Candace Groth

Candace Groth is a senior attorney at Vela Wood. She focuses on mergers & acquisitions and complex LLC matters.

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