Representations and warranties insurance in M&A deals

Representations and warranties insurance (RWI) is a policy, usually bought by the buyer in a business acquisition, that pays for losses caused by breaches of the seller's representations in the purchase agreement. It replaces most of the seller's indemnity escrow, so the seller can walk away with more of the price and the buyer still has a source of recovery. It does not cover problems the buyer knew about before signing, and it is negotiated deal by deal.

Why RWI exists

In an acquisition the seller "represents and warrants" a long list of facts: the financial statements are accurate, material contracts are in force, taxes are paid, no litigation is threatened, intellectual property is owned. If a statement turns out false, the buyer claims against the seller under an indemnity clause. Traditionally the seller left a slice of the price in escrow, commonly around 10%, for the 12 to 18 months the representations survived. Sellers, especially private equity funds returning capital to investors, dislike that. Buyers dislike chasing sellers for money.

RWI moves the risk to an insurer. Gallagher's 2026 RWI overview estimates the product is used in about 75% of private equity transactions, about 64% of larger strategic transactions and about 20% to 30% of secondary transactions, and says around thirty providers write it for U.S. deals. The policy is placed by a specialty broker, on non-admitted paper often, so the surplus lines rules of the buyer's state apply (see excess and surplus lines insurance explained and workers' comp and benefits requirements by state).

What the policy covers and how it is built

Two points trip up first-time buyers. First, the retention is often shared. A Cooley analysis published in 2024 noted that retention is often split 50/50 between a buyer deductible and a seller indemnity escrow, though no-seller-indemnity deals were 36% of insured deals in 2023. Second, the policy generally covers losses from breaches of the representations as written. If the contract's reps are thin, the policy is thin.

What it excludes

Exclusions come in two kinds, according to Gallagher: standard exclusions in every policy and deal-specific exclusions found in underwriting.

• Known matters. Anything the buyer's deal team knew about at inception is outside the cover. This is the exclusion that most often decides disputes, so the definition of "knowledge" and whose knowledge counts are central negotiation points.
• Asbestos and certain pollutants such as PCBs, and the availability or use of net operating losses. (Gallagher's examples.)
• Pension underfunding, purchase price or working capital adjustments and covenant breaches, which a Cooley summary from 2019 lists among the standard carve-outs.
• Deal-specific exclusions where diligence found a problem or the insurer was not given enough comfort. Hub International's 2026 transactional risk briefing says well-prepared deals can obtain flexible coverage without exclusions beyond market standards or identified diligence issues, and that underwriters have focused on financial statements, revenue quality, material customers and contracts, with extra scrutiny on trade and tariff exposure in manufacturing and cross-border deals.

The seller's disclosure schedule matters too. Matters listed in it generally do not count as breaches. RWI is not a substitute for diligence; the insurer relies on the buyer's advisers' reports, and gaps in them often become exclusions. Related coverage for a specific known tax position is a separate product; see tax insurance in deals: what transactional tax policies cover.

The process, step by step

1. Engage a broker before signing. Gallagher suggests starting about a month before signing, earlier if human capital or insurance diligence is needed.
2. Collect non-binding indication letters. Multiple insurers quote limit, retention, premium and expected exclusions.
3. Choose an underwriter and pay the underwriting fee. Hub puts fees at roughly $35,000 to $50,000 for a single-carrier primary placement and about $5,000 per excess layer.
4. Underwriting. The insurer reviews the purchase agreement and the buyer's financial, legal, tax and other diligence reports, then holds a call with the deal team. For deals under $25 million enterprise value, Hub describes streamlined products without underwriting calls or formal third-party diligence reports.
5. Bind at signing. The policy incepts at signing, with a no-claims declaration at closing if the two are separate.
6. After closing, the buyer reports any suspected breach to the insurer during the policy period, within the policy's notice rules.

A hypothetical

Say a private equity-backed buyer purchases a software distributor for an enterprise value of $60 million. It buys a $6 million RWI limit, 10% of enterprise value. The retention is 0.5% of enterprise value ($300,000), dropping to 0.25% ($150,000) after 12 months. At a 3% rate on line, the premium is $180,000, plus an underwriting fee of $35,000 to $50,000, broker compensation and surplus lines tax, which varies by state.

Fourteen months after closing, the buyer finds that the seller recognized revenue early, and the financial statements representation was untrue. The buyer's loss, measured under the policy, is $1.5 million. The retention has dropped to $150,000, so the insurer owes $1.35 million, subject to the policy's exclusions and its determination that the buyer did not know of the problem before inception. A financial statements breach is the most frequent claim type in the data below. The figures are invented to show the mechanics and are not market quotes.

What the claims data shows

Aon's 2026 Transaction Solutions Global Claims Study highlights, dated June 3, 2026, report for North America:

• Aon's clients recovered more than $440 million in R&W claims in 2025, a record for a single year.
• The median R&W payment exceeded $8.2 million, and the average exceeded $10 million.
• About 18% of R&W policies bound between 2019 and 2023 had at least one claim notification.
• About 51% of claims were notified more than 12 months after closing, often after the seller escrow had expired.
• By paid loss, the top breach types on policies placed since 2019 were financial statements (38%), material contracts (21%), compliance with laws (15.1%) and intellectual property (11%).

Gallagher similarly reports claims noticed on around 20% of policies. These are broker-compiled figures for their own clients, not market-wide statistics. They support the point that RWI is a product that pays real claims, and that late discovery is normal.

Questions to ask before binding

1. How is "knowledge" defined, and whose knowledge counts?
2. Which reps are covered fully, and which are limited by an exclusion or a "to the knowledge of the seller" qualifier?
3. Is there a materiality scrape, so that "material" qualifiers in the reps are ignored when calculating loss?
4. What is the retention and drop-down, and does it apply to fundamental reps?
5. How does the policy treat consequential and multiplied damages?
6. What are the notice requirements and the insurer's claims-handling record?
7. If a lender or investment committee needs the coverage, does the policy satisfy it?

If the target's own insurance is in question, see insurance due diligence when buying a business. A D&O run-off policy for the target's directors is a separate purchase; see Directors and officers (D&O) insurance explained.

Key takeaways

• RWI is a buyer-side policy that covers breaches of the seller's representations, and it typically replaces most of a seller indemnity escrow.
• Common structure: a limit near 10% of enterprise value, a retention that drops after 12 months, three years of cover for general reps and six or seven years for fundamental reps.
• The cover excludes what the buyer knew, plus standard items like pension underfunding and purchase price adjustments, and any deal-specific exclusions from underwriting.
• Aon's 2026 study shows record recoveries and late notification: about 51% of claims came more than 12 months after closing.
• Engage the broker early, and treat the underwriting call as part of your diligence, not a formality.