Reps and Warranties Insurance: How It’s Changing the Way M&A Deals Get Done

Ten years ago, reps and warranties insurance was a curiosity in the middle market — used occasionally, viewed skeptically, and priced in a way that made it work only for large transactions. Today, it is close to standard. In the deals we are running on the sell side for entrepreneur and founder clients, an RWI policy is the default assumption and the question is no longer whether to use one, but how to structure the deal around it.

This shift has changed M&A in ways that benefit both buyers and sellers — and that founders selling their businesses should understand before they negotiate their next transaction.

What RWI actually does

Every M&A purchase agreement contains representations and warranties — the seller’s statements about the condition of the business. The financials are accurate. The contracts have been disclosed. The taxes have been paid. The employees are properly classified. The intellectual property is owned. There are dozens of these statements, and each one is a potential indemnification claim if it turns out to be wrong.

Traditionally, the buyer’s recourse for a breach of these reps was the seller — either through an indemnification escrow held back at closing or through direct claims against the seller for years afterward. That meant the seller’s payment was not really final at closing. It was final twelve to twenty-four months later, after the escrow released and the survival period for indemnification claims expired.

RWI changes that. Instead of looking to the seller, the buyer looks to an insurance policy. The seller still makes the reps, but the buyer’s claim for a breach goes to the insurer rather than the seller. The seller’s exposure is dramatically reduced, and the seller’s proceeds from the sale are largely freed up at closing rather than locked in escrow.

The economics that made RWI take off

RWI is not free, but it has become competitively priced. A typical policy runs:

• Premium of roughly two to four percent of policy limit (the policy limit is usually ten percent of enterprise value).
• Underwriting fees of forty thousand to seventy-five thousand dollars depending on deal complexity.
• A retention — the insurance equivalent of a deductible — of one half to one percent of enterprise value, dropping after twelve months.

For a thirty-million-dollar transaction, the all-in cost is often in the range of one hundred fifty to two hundred fifty thousand dollars. That is real money, but it is also money that historically was being spent in other ways — through higher escrows, longer survival periods, more drawn-out negotiations, and indemnification claims that consumed legal fees in the years after closing.

In most modern deals, the cost is split between buyer and seller, often fifty-fifty, though the negotiation varies. Some sellers view the cost as worth paying entirely themselves for the benefit of a clean exit.

How RWI changes the negotiation

The most significant change is that the indemnification negotiation gets simpler. Without RWI, the parties spend significant time arguing about escrow size, survival periods, caps, baskets, and what kinds of breaches are subject to what kinds of limits. The seller wants a small escrow with a short survival period. The buyer wants more protection. The compromise consumes weeks of negotiating time and frequently breaks deals.

With RWI, most of that goes away. The seller’s indemnification obligation is typically capped at the retention layer — the half-percent the policy does not cover — and the escrow shrinks accordingly. The buyer is protected by the policy. The seller is protected by the policy limit. Both sides know exactly what their exposure looks like.

RWI is not about reducing the seller’s reps. It is about who pays when a rep turns out to be inaccurate.

What RWI does not cover

It is important to understand what stays outside the policy. RWI typically excludes:

• Known issues identified in due diligence and disclosed in the disclosure schedules.
• Breaches the buyer was aware of before signing.
• Certain categories of liability that the market treats as uninsurable — pension underfunding, certain environmental exposures, forward-looking statements.
• Specific indemnities the parties negotiate outside the rep framework, such as tax indemnities for pre-closing periods, which often remain a direct seller obligation.

These exclusions are negotiated during the underwriting process, and a good RWI broker will help the parties understand exactly what is and is not covered before the policy is bound.

The underwriting process: what to expect

RWI underwriting runs in parallel with the M&A diligence process and typically takes two to three weeks. The insurer reviews the due diligence reports, the disclosure schedules, the draft purchase agreement, and selected pieces of the underlying diligence files. The insurer’s diligence is usually focused — they are not redoing the buyer’s work, but spot-checking it and identifying coverage exclusions.

From the seller’s perspective, RWI underwriting is mostly invisible — it happens between the buyer and the insurer. From the buyer’s perspective, it adds a workstream that needs to be managed but generally does not delay closing if it is started promptly.

When RWI does not work

RWI is not a fit for every deal. Some situations where it does not work well:

• Smaller transactions — typically below twenty to twenty-five million dollars in enterprise value — where the fixed costs of the policy make the economics unfavorable.
• Deals with significant known issues that the insurer will exclude from coverage, leaving the buyer back in the position of needing seller indemnification anyway.
• Deals in industries the insurer does not want to underwrite at acceptable pricing — historically including certain healthcare segments, financial services, and businesses with significant environmental or regulatory exposure.
• Deals where the timing is too compressed to complete underwriting.

The bottom line for founders

If you are selling a business in the middle market — roughly twenty-five million dollars and up in enterprise value — RWI should be in your conversation from the earliest stages of the process. Not because it is right for every deal, but because it has become common enough that not considering it is leaving a tool on the table that often produces a cleaner exit, less locked-up consideration, and a faster negotiation.

The buyer often raises RWI first because buyers have used it more frequently. Sellers should be just as prepared. A seller who walks into an LOI conversation with a clear view of how RWI would work for their specific deal is negotiating from a stronger position than a seller who is hearing about it for the first time.

Frequently Asked Questions

What is reps and warranties insurance in an M&A deal?

Reps and warranties insurance (RWI) is a policy that covers the buyer for losses arising from breaches of the seller’s representations and warranties in the purchase agreement. Instead of looking to the seller for indemnification, the buyer looks to the insurer.

Who buys the RWI policy — the buyer or the seller?

In the vast majority of transactions, the buyer is the named insured. Sell-side policies exist but are rare. The buyer’s policy is the standard structure because it gives the buyer a direct claim against the insurer for breaches of the seller’s reps.

How much does RWI cost?

Pricing varies, but a typical premium runs roughly two to four percent of the policy limit, plus underwriting fees and a retention (deductible) usually set at one half to one percent of enterprise value. Costs have come down meaningfully over the past several years as the market has matured.

Does RWI eliminate the need for an indemnification escrow?

It significantly reduces the escrow but rarely eliminates it. A small escrow — typically half a percent of purchase price — often remains to cover the retention layer that the policy does not pick up. Beyond that, the seller’s indemnification obligations are typically capped at the retention.

When does RWI make sense?

RWI makes sense in most middle-market transactions where the enterprise value exceeds roughly twenty-five million dollars and where the parties want a clean post-closing exit for the seller. Below that size, the policy economics often do not work. Above it, RWI has become close to standard.

About the Author

Scott Levine is the Founder and Managing Partner of AEGIS Law, a national law firm built on a fundamentally different model: lawyers focus exclusively on practicing law while a dedicated management team runs the business. Scott has spent nearly thirty years guiding entrepreneurs, founders, and closely held companies through mergers, acquisitions, growth transactions, and exits. He works alongside the firm’s M&A team — including Rochelle Walk, Robert Gold, and others — across AEGIS offices in St. Louis, Chicago, Denver, Tampa Bay, and Southern Illinois. He can be reached through aegislaw.com.