Representations and Warranties Insurance:
The M&A Attorney's Guide

Representations and warranties (R&W) insurance is a transaction insurance product that covers losses arising from a breach of the seller's representations and warranties in the purchase agreement. Instead of (or in addition to) holding purchase price in escrow as a remedy for post-closing claims, either the buyer or seller purchases a policy that pays claims for rep and warranty breaches. Buyer-side R&W insurance is most common - the buyer purchases a policy that pays directly if the seller's reps turn out to be wrong. Seller-side policies shift the obligation from the seller to the insurer. R&W insurance has become standard in private equity transactions and is increasingly used in lower middle-market deals.

In many deals, yes - R&W insurance is used specifically to eliminate or reduce the escrow holdback. Sellers prefer this because they receive full purchase price at closing without a portion held in escrow. Buyers accept the trade because the insurer's credit stands behind the representations instead of the seller's personal obligation. In a clean R&W-insured deal, the seller may have minimal or zero post-closing liability, and the buyer claims against the insurer (not the seller) for rep and warranty breaches. However, certain representations - fundamental reps like title, authority, and capitalization - typically still survive and are backed by seller indemnification regardless of the R&W policy.

Standard exclusions in R&W insurance policies include: known breaches (anything the parties were aware of at signing), purchase price adjustments (working capital true-ups), forward-looking statements (projections and forecasts), environmental liabilities in some policies, cybersecurity breaches, fraud by the seller, and specific deal risks disclosed in the due diligence schedules. The policy typically has a retention (similar to a deductible) that the buyer must absorb before the insurer pays. The retention is typically 0.5-1% of enterprise value. Buyers should read the specific exclusions carefully - policies are not standardized and coverage varies by insurer and deal.

In most modern transactions, the buyer purchases and pays for the R&W policy. Buyer-side policies are overwhelmingly more common than seller-side policies because they give the buyer a direct right to claim against the insurer without going through the seller. The cost typically runs 2-4% of the policy limit (not the deal value). On a $10M policy limit for a $50M deal, the premium would be roughly $200,000-$400,000. This cost is sometimes negotiated as part of the overall deal economics - some sellers agree to share the premium cost in exchange for a cleaner seller release from post-closing liability.

R&W insurance has traditionally been used in deals above $25M, where the premium is a small percentage of deal value and the policy limit is meaningful. As the market has matured, products for smaller deals have emerged. At the $5M-$25M level, R&W insurance can make sense when: the seller wants a clean exit with no post-closing exposure, private equity buyers require it as standard, or the parties are struggling to agree on escrow amount and duration. Below $5M, the administrative costs and premium often outweigh the benefit. The best way to evaluate fit is to get an indicative quote from an R&W insurer early in the deal process - before signing the LOI.