In mergers and acquisitions (M&A), the allocation of exposure to the target company’s risks and liabilities – in particular, who bears the financial burden if the seller’s claims prove inaccurate – is a highly negotiated aspect of the transaction. Traditionally, these liabilities are handled through negotiated indemnification clauses in the purchase agreement, an escrow funded by a portion of the purchase price, or the buyer’s right to claw back part of the purchase price directly from the seller.

Representations and warranties insurance (RWI) is another option that allows a nonparty (an insurance company) to bear the financial risks of misrepresentation or breach. According to the 2025 M&A Deal Terms Study by SRS Acquiom Inc., RWI was identified in more than one-third of 2024 M&A deals valued between $25 million and $750 million.^[1] The same study found that RWI was identified in 10% of deals valued under $25 million; certain insurance agencies report that they have seen coverage for deals valued at much lower amounts, even $5 million.^[2] For deals over $50 million, the number of deals in which RWI was identified grew to over 44%.

As RWI remains prominent in M&A transactions, it is important for transactional lawyers to be familiar with it and understand why it may be useful for their clients. This article provides a brief overview of RWI, focusing on the following: 1) what representations and warranties are, 2) what RWI is and why it is used, 3) the key components of an RWI policy, and 4) common exclusions. A checklist for attorneys is included.

What Are Representations and Warranties?

In the M&A context, a representation (or rep) is an assertion of a past or existing fact, made by a buyer or seller, that is true as of the date given, and is intended to induce the other party to enter into an agreement.^[3] A warranty is a promise that a statement of fact is true and that the promise will remain true.^[4]

Although representations and warranties are separate legal concepts, contracts rarely make the distinction between the two.^[5] Representations and warranties are frequently combined, with preamble statements such as the following: “the Seller hereby represents and warrants that….”^[6]

In an agreement without RWI, a misrepresentation or breach typically triggers an indemnification obligation that one party (usually the buyer) can pursue against the other party (usually the seller). However, the introduction of RWI has fundamentally altered this dynamic, shifting the source of recovery from the seller to a third-party insurer.

What is RWI and Why Use It?

An RWI policy is either “buyer side” (meaning, the buyer is the policy holder and the insured party) or “seller side” (meaning, the seller is the policy holder and the insured party). Under buyer-side policies, which some reports indicate represent the vast majority of RWI policies (at over 90%),^[7] the need for a traditional escrow or holdback is significantly reduced. Instead of seeking to recover from the seller, the buyer can recover directly from the insurer. In seller-side policies, the sellers remain directly liable to the buyer under the purchase agreement; however, the insurance serves as a protective layer to reimburse sellers for covered losses resulting from indemnification claims.

For buyers, RWI has a number of benefits, including the following:^[8]

• Strengthen Bid Competitiveness. A buyer using RWI can offer a “cleaner” bid. By relying on RWI for recovery rather than demanding a traditional holdback or escrow, the buyer’s proposal becomes more attractive to sellers looking for certainty and greater liquidity at closing.

• Preserve Post-Closing Relationships. RWI acts as a buffer between the buyer and the target’s management or investors. By shifting the claims process to an insurer, the buyer avoids the friction of pursuing sellers, who often remain as key employees or partners, in the event of a breach.

• Bridge Indemnification Gaps. RWI is a flexible tool to align differing expectations. If a buyer requires more robust protection than a seller is willing to provide in the acquisition agreement, the policy can supplement those obligations to reach a deal-closing compromise.

• Support Acquisition Financing. Lenders often view RWI as a credit enhancement. Because insurance proceeds can be assigned to the lender, RWI provides an additional layer of security that can be particularly influential in securing favorable terms for highly leveraged transactions.

• Provide Financial Protection. RWI allows the buyer to collect on claims even if the seller is insolvent or has been liquidated post-closing.

For a seller, RWI’s benefits include the following:^[9]

• Purchase Price Certainty. By offsetting potential indemnification losses, seller-side RWI ensures that the proceeds negotiated at the table remain in the sellers’ pockets, providing a more predictable financial outcome.

• Optimize Seller Returns. RWI reduces the sellers’ need to maintain internal cash reserves for contingent liabilities. This liquidity allows for the faster distribution of proceeds to stakeholders, thereby maximizing the internal rate of return.

By shifting the claims process to an insurer, the buyer avoids the friction of pursuing sellers, who often remain as key employees or partners, in the event of a breach.

Key Components of an RWI Policy

Although RWI policies are tailored to individual transactions, there are several typical terms and features.

• Coverage: The scope of the RWI coverage dictates which representations and warranties are covered by the policy. Fundamental reps typically include good-standing status, authority to sell, title to assets, ownership structure, capitalization, and taxes.

  General reps often include financial statements, material contracts, employment matters, and compliance. Specific reps commonly involve deal-specific liabilities or issues that are discovered during due diligence, such as intellectual property, environmental matters, and employee benefits.

• Deductible or Retention: As with many insurance policies, the insured pays a deductible (or a retention) before a claim can be paid out under an RWI policy. For RWI policies, deductibles typically range from 0.5% to 2% of the value of the underlying transaction.^[10] For seller-side RWI policies, a seller might request that the deductible be equal to the basket in the purchase agreement.

• Duration: RWI policy periods can be tailored to match the indemnification windows in the acquisition agreement, but the industry standard is a “3/6 split.”^[11] This provides a three-year window for breaches of general representations and a six-year window (or the relevant statute of limitation) for tax and fundamental representations.^[12] Market trends show insurers offering six-year blanket coverage for all representations, rather than applying shorter survival limits to general representations.^[13] These periods can be extended for an additional premium.^[14] The policy duration may extend beyond the survival periods in the purchase agreement. This provides the buyer with a “tail” of protection even after the seller’s direct indemnity obligations have expired.

• Coverage Amount or Limits: The typical range of RWI policy limits is 10-20% of the target company’s total enterprise value or purchase price.^[15]

• No-Claims Declaration: Before an insurer will provide coverage, underwriters require the insured to provide a no-claims declaration. This document confirms that the transaction’s core deal team members are unaware of any existing or anticipated breaches of the covered representations and warranties. To ensure clarity, this declaration is typically limited to the “actual knowledge” of a defined list of individuals, rather than the company at large. The intent is to reinforce that RWI is designed to cover unknown risks, not losses already identified during the diligence process.^[16]

• Premium: The premium is typically calculated as a percentage of the total coverage limit, generally ranging from 2.5% to 6%.^[17] The price is affected by a number of factors – underwriters determine the final rate by evaluating the transaction’s specific risk profile, including the enterprise value, the selected retention levels, the target’s industry, and the length of the survival period.^[18] Weight is also given to the thoroughness of the buyer’s due diligence, the length of time between signing and closing, and prevailing market volatility. The premium is typically a one-time, upfront cost (paid at closing) for the entire policy period.^[19]

• Subrogation: After a claim is paid, insurers generally retain the right of subrogation, allowing them to seek recourse against the parties responsible for the loss. In the context of RWI, this is a frequent point of negotiation to facilitate a “clean exit” for sellers. Most buyer-side policies include a waiver of subrogation against the sellers, except in the narrow instance of common-law fraud. This ensures that, absent intentional dishonesty, the sellers’ proceeds from the sale remain undisputed and that the insurer cannot pursue them for unintentional breaches.

• Underwriting Fee: In addition to the premium, carriers charge a separate underwriting fee to compensate for the legal expenses of their external counsel; such fees can range from $20,000 to $75,000.^[20] This one-time, nonrefundable fee is often due at the start of the formal underwriting process.

Common Exclusions

Certain categories of risk are standard exclusions, including: 1) known issues (that is, issues that the deal-making team was aware of before the policy’s inception), 2) net operating losses or forward-looking statements (such as future performance or revenue projections), 3) criminal fines or penalties, 4) pension underfunding or withdrawal liability, and 5) world-event exclusions (for example, pandemics and wars).^[21] Underwriters may also seek exclusions for asbestos or PFAS.^[22]

Checklist for RWI Deals

When drafting a purchase agreement for an RWI-backed deal, the following items should be included:

• The “Insurance Neutral” Clause: Ensure the purchase agreement explicitly states that the buyer’s sole recourse for breaches of representation (except in cases of fraud) is the RWI policy.

• Survival Periods: Carefully review the survival period in the purchase agreement to ensure that the RWI policy is either the same period or extends beyond the stated period in the purchase agreement.

• Subrogation: Insurers will reserve the right to sue the seller if the insurer must pay out a claim caused by the seller’s actual fraud. Ensure the subrogation clause in the policy and the purchase agreement are aligned and narrowly tailored.

Conclusion

RWI has effectively decoupled the concept of remedy from the seller. While it adds a layer of complexity to the pre-closing process and requires significant upfront costs before closing, the numerous benefits and strategic advantages for buyers and sellers are worth considering. RWI is an important concept for transactional lawyers to familiarize themselves with, not only on the buyer’s side, but also on the seller’s side.

Endnotes

[1] Kip Wallen, 2025 Special Report: Influence of RWI on M&A Deal Terms, SRS Acquiom: Insights (2025), https://www.srsacquiom.com/our-insights/reps-warranties-findings/. ^

[2] Id.; The Horton Group, Reps & Warranties Insurance: Key Trends and Opportunities in Q2 2025, The Horton Group: Resources (2025), https://www.thehortongroup.com/resources/reps-warranties-insurance-key-trends-and-opportunities-in-q2-2025/. ^

[3] Representation, Black’s Law Dictionary (12th ed. 2024). ^

[4] Warranty, Black’s Law Dictionary (12th ed. 2024). ^

[5] Sean J. Griffith, Deal Insurance: Representation & Warranty Insurance in Mergers & Acquisitions, 104 U. Minn. L. Rev. 1839, 1840 (2020), https://ir.lawnet.fordham.edu/faculty_scholarship/973. ^

[6] Id. at 1841. ^

[7] Reps and Warranties Insurance for Search Funds FAQs, Relay Invs., https://www.relayinvestments.com/search-resource/reps-and-warranties-insurance-for-search-funds-faqs (last visited Mar. 26, 2026). ^

[8] Reps and Warranties Insurance: A Critical Tool for Dealmakers, Marsh, https://www.marsh.com/content/dam/marsh/Documents/PDF/marsh-tp/reps_warranties_insurance.pdf (last visited Mar. 26, 2026) [hereinafter Critical Tool for Dealmakers]; Kip Wallen, A Primer on Representations and Warranties Insurance, SRS Acquiom, https://www.srsacquiom.com/our-insights/representations-and-warranties-insurance/ (last visited Mar. 26, 2026) [hereinafter Wallen, Primer]. ^

[9] Critical Tool for Dealmakers, supra note 8; Wallen, Primer, supra note 8. ^

[10] SRS Acquiom, Reps & Warranties Insurance (RWI) Fast Facts, https://www.srsacquiom.com/our-insights/reps-warranties-insurance-rwi-fast-facts/ (last visited June 4, 2026); Critical Tool for Dealmakers, supra note 8; John T. McDonald et al., Closing with Confidence: Representations and Warranties Insurance in M&A, JD Supra (Sept. 5, 2024), https://www.jdsupra.com/legalnews/closing-with-confidence-representations-9421052/. ^

[11] Critical Tool for Dealmakers, supra note 8; Wallen, Primer, supra note 8. ^

[12] Critical Tool for Dealmakers, supra note 8; Wallen, Primer, supra note 8. ^

[13] Ice Miller, Reps and Warranties Insurance Market Trends Cheat Sheet, Ice Miller: Thought Leadership (May 17, 2024), https://www.icemiller.com/thought-leadership/reps-and-warranties-insurance-market-trends-cheat-sheet [hereinafter Market Trends Cheat Sheet]. ^

[14] Id. ^

[15] Frank S. Turner, Jr., Private Company M&A – Rep & Warranty Insurance: A “Zero Liability” Promised Land for Sellers?, Whiteford, Taylor & Preston: News & Events (Aug. 1, 2019), https://www.whitefordlaw.com/news-events/private-company-ma-rep-warranty-insurance-a-zero-liability-promised-land-for-sellers; Market Trends Cheat Sheet, supra note 13. ^

[16] Wallen, Primer, supra note 8. ^

[17] Id.; Joseph G. Owens, Inside Representations & Warranties Insurance for Mergers & Acquisitions, Owens Group: Blog (May 15, 2023), https://www.owensgroup.com/inside-representations-warranties-insurance-for-mergers-acquisitions/. ^

[18] Wallen, Primer, supra note 8; Teresa A. Beaufait & Anshu S. K. Pasricha, Nuts & Bolts of Representations and Warranties Insurance, Koley Jessen: Attorneys (2015), https://www.koleyjessen.com/assets/htmldocuments/wp-content/uploads/Client-Alert-Nuts-Bolts-of-Representations-and-Warranties-Insurance.pdf. ^

[19] Critical Tool for Dealmakers, supra note 8. ^

[20] Mika Pangilinan, What Is Representations and Warranties Insurance?, Insurance Business America (May 17, 2023), https://www.insurancebusinessmag.com/us/guides/what-is-representations-and-warranties-insurance-168796.aspx; Robert A. Hamill, Joseph M. Kahn & Alec T. Mercolino, Representations and Warranties Insurance in Physician Practice Acquisitions, Hall Render: Health Law News (Aug. 19, 2022), https://hallrender.com/2022/08/19/representations-and-warranties-insurance-in-physician-practice-acquisitions/. ^

[21] Critical Tool for Dealmakers, supra note 8; Woodruff-Sawyer & Co., Guide to Representations and Warranty Insurance (2023 ed.), https://www.thomsonreuters.com/en-us/posts/wp-content/uploads/sites/20/2023/09/Guide-to-Representations-Warranties-Insurance-2023-Woodruff-Sawyer.pdf. ^

[22] Joseph Castelluccio & Paul de Bernier, Consider a Key Insurance Tool for Environmental M&A Deals, Law360 (Jan. 11, 2024, 5:56 PM EST), https://www.mayerbrown.com/-/media/files/perspectives-events/publications/2024/01/consider-a-key-insurance-tool-for-environmental-ma-deals.pdf%3Frev=891c7314d6af4d52bcd1545ccfd6b123. ^