Representations and warranties insurance (RWI) is a policy that pays for financial losses caused by inaccuracies in the seller's contractual statements about the business, replacing most of the seller's post-closing indemnification exposure in an M&A deal. In the recent market, premiums have generally run about 2.5% to 3.5% of the policy limit as a one-time cost, with an initial retention (the deductible) near 1% of deal value or lower. On insured deals, the median indemnification escrow drops from roughly 10% of the purchase price to about 0.5%.
Buyers like RWI because an insurer with a strong balance sheet stands behind the reps. Sellers like it because they keep more cash at closing and exit cleaner. Here is how the product works, what it costs, where it breaks down, and what it means for the owner of a private company in the lower middle market.
What RWI covers
In a purchase agreement, representations and warranties are the seller's factual statements about the business: the financial statements are accurate, taxes have been paid, material contracts are disclosed and in force, there is no undisclosed litigation, the company owns its assets, and so on. When a statement turns out to be false after closing and the buyer suffers a loss, the buyer traditionally recovers through indemnification, the seller's contractual promise to make the buyer whole, usually secured by an escrow (a slice of the purchase price held back by a neutral agent).
An RWI policy shifts that risk to an insurer. It covers financial loss, including defense costs, arising from breaches of the reps that the insured did not actually know about at closing. Policies are written on a claims-made basis, meaning a claim must be made within the defined policy period, and that period can be set longer than the survival period negotiated in the agreement (survival is how long the reps remain enforceable after closing). The policy can play three roles: a backstop behind the seller's indemnity, a supplemental layer above the seller's cap, or a complete replacement in which the policy is the buyer's sole recourse for rep breaches.
Buy-side vs. sell-side policies
Either party can be the insured, and the two structures work differently.
- Buy-side policy. The buyer is the insured and claims directly against the insurer; this is first-party coverage. A buy-side policy protects the buyer even when the breach results from seller fraud, and the insurer's right of subrogation (recovering its payout from the seller) is typically limited to fraud. Buy-side policies make up the large majority of the U.S. market.
- Sell-side policy. A third-party liability policy. The seller remains liable to the buyer under the purchase agreement and looks to the insurer for reimbursement. It does not cover the seller's own fraud. Sell-side policies are the minority, used mainly to backstop an indemnity the seller could not avoid giving.
Who is insured and who pays are separate questions. The premium is a deal cost negotiated like any other: paid by the buyer, split, or effectively charged to the seller through the purchase price.
What a policy costs
| Component | Typical range (recent market) | Notes |
|---|---|---|
| One-time premium | Roughly 2.5% to 4% of the policy limit | Averaged 5% to 6% at the 2022 peak; carrier competition has since pushed pricing toward the low end |
| Underwriting fee | $25,000 to $50,000 | Non-refundable, charged when the carrier begins underwriting; separate from the premium |
| Initial retention | About 1% of enterprise value; as low as 0.25% to 0.5% on some smaller deals | Often steps down 12 to 18 months after closing; commonly funded 50/50 by buyer and seller |
| Policy limit | Commonly about 10% of enterprise value | Minimum limits now reach down to roughly $3 million to $5 million; larger programs stack excess layers |
| Taxes and broker costs | Varies by state | Surplus-lines and premium taxes are added on top of the premium |
Illustration: on a $40 million acquisition, the buyer purchases a $4 million policy limit (10% of deal value). At a 3% rate the premium is $120,000, plus an underwriting fee near $40,000 and state surplus-lines taxes. The initial retention is $400,000. The parties agree the seller funds half of it through a $200,000 escrow and the buyer absorbs the rest, so the seller's money at risk for general rep breaches is 0.5% of the price instead of the 10% escrow typical of uninsured deals. These figures are general educational ranges drawn from recent market commentary, not quotes; pricing moves with the insurance cycle and with deal-specific risk.
What RWI excludes
RWI is not blanket deal insurance. Standard exclusions include:
- Known and disclosed matters. Anything on the disclosure schedules, or actually known to the buyer's deal team at closing, is not covered. RWI insures the unknown.
- Covenant breaches and purchase price adjustments. Promises about conduct (non-competes, pre-closing operations) and working capital true-ups are contract mechanics, not reps.
- Forward-looking statements. Projections and earn-out outcomes are not insurable reps.
- Fines, penalties, and non-monetary relief. Amounts uninsurable as a matter of law, plus injunctions and other equitable remedies.
- Deal-specific exclusions. Whatever the underwriter could not get comfortable with: a thinly diligenced area, a specific tax position, pending litigation. These risks are often handled instead through a special indemnity from the seller or a separate tax or contingent-liability policy.
Exclusion breadth is a market variable. In the soft market of the past few years, carriers competing for fewer deals have written fewer deal-specific exclusions and have increasingly covered areas they once carved out, such as cybersecurity and data privacy reps.
The underwriting process
RWI underwriting rides on top of the buyer's own diligence rather than duplicating it.
- Submission. A specialty broker sends the deal package (financials, information memorandum, draft purchase agreement) to carriers. Non-binding indications of premium, retention, and areas of concern typically come back in two to four business days.
- Carrier selection. The buyer picks a quote and pays the underwriting fee.
- Underwriting diligence. The carrier reviews the buyer's third-party diligence reports (quality of earnings, legal, tax), the data room, and the purchase agreement, then holds an underwriting call with the buyer's deal team. Formal underwriting generally takes one to two weeks; carriers commonly quote 7 to 10 business days from engagement.
- Policy negotiation. Counsel negotiates the definition of loss, the exclusions, and how the policy tracks the agreement's reps.
- Binding. Coverage is bound at signing. At closing the buyer delivers a no-claims declaration confirming the deal team is not aware of existing breaches.
The practical lesson for sellers: underwriters insure what has been diligenced. A weak or missing diligence workstream does not save money; it becomes an exclusion, which pushes that risk back onto the negotiating table.
RWI vs. escrow in the lower middle market
RWI has a size floor. The underwriting fee and minimum premiums are fixed costs, so on small deals they swamp the benefit. Insured transactions typically start around $30 million in deal value. Carriers have stretched minimum policy limits down to roughly $3 million, but below about $20 million in enterprise value coverage remains less attractive and is often unavailable on sensible terms.
That splits the lower middle market in two:
- Smaller deals (below roughly $20 to $30 million). The traditional structure still governs: a negotiated seller indemnity with survival periods, caps, and baskets, secured by an escrow or holdback. On uninsured private-target deals, the median indemnification escrow runs about 10% of transaction value, and median total escrows (including separate purchase price adjustment escrows) about 11.3%.
- Larger deals, especially with private equity buyers. RWI is routine and the escrow shrinks to a sliver: the median indemnification escrow on insured deals is about 0.5% of transaction value.
The difference is real money. On a $10 million uninsured sale, a 10% escrow parks $1 million of the seller's proceeds with an escrow agent, often for a year or more. On an insured $40 million sale, the equivalent holdback might be $200,000. Preparation pays under either structure: organized financial records and a quality of earnings report speed underwriting and reduce exclusions. Sell-side platforms such as Bankerly.ai exist partly to bring smaller companies to that standard of preparation before buyers and underwriters arrive.
How RWI changes the indemnification negotiation
Once RWI enters the structure, the indemnification pages of the purchase agreement get shorter and quieter.
- Seller exposure collapses. Instead of a double-digit escrow and a hard-fought indemnity cap, the seller's exposure for general rep breaches is typically half the retention, and in no-seller-indemnity (public-style) deals it is zero. No-seller-indemnity structures represented 36% of insured transactions in 2023, down from 51% in 2022.
- The fight moves to the policy. Negotiating energy shifts from survival periods and baskets to the policy's exclusions and to who bears any excluded risk. An excluded matter usually resurfaces as a special indemnity or a price adjustment.
- Sellers still carry some risk. Fraud (the insurer can subrogate against a fraudulent seller), covenant breaches, purchase price adjustments, and negotiated special indemnities all live outside the policy.
- Claims are not theoretical. Roughly one in six issued policies sees a claim, and breaches of financial statement reps are the most common source, followed by material contracts and compliance with laws. That is why underwriters lean so hard on quality of earnings work.
This article is educational information about U.S. market practice, not legal, tax, or insurance advice; policy terms vary by deal, and sellers should rely on qualified M&A counsel and an experienced RWI broker.
Sources
- Cooley: Reps and Warranties Insurance Considerations as M&A Slows
- SRS Acquiom: Reps and Warranties Insurance (RWI) Fast Facts
- Koley Jessen: Nuts & Bolts of Representations and Warranties Insurance
- DealLawyers.com: Study: Private Target Deal Terms (SRS Acquiom escrow data)
- McDermott: Representations & Warranties Insurance: Understanding the Underwriting Process, Timeline, and Key Coverage Terms
Frequently asked questions
- What does representations and warranties insurance cover in M&A?
- RWI covers financial loss, including defense costs, from breaches of the seller's representations and warranties in the purchase agreement that the insured did not know about at closing. It does not cover known or disclosed issues, covenant breaches, purchase price adjustments, or forward-looking statements. Policies are claims-made, and the policy period can extend beyond the survival periods negotiated in the agreement.
- How much does rep and warranty insurance cost?
- The one-time premium has recently averaged about 2.5% to 3.5% of the policy limit, down from 5% to 6% at the 2022 peak, plus a non-refundable underwriting fee of roughly $25,000 to $50,000 and state surplus-lines taxes. A common structure buys a limit near 10% of enterprise value, so a $40 million deal might carry a $4 million policy costing around $120,000 in premium.
- Who pays for reps and warranties insurance, the buyer or the seller?
- It is negotiated like any other deal cost. The buyer is usually the insured under a buy-side policy, but the premium may be paid by the buyer, split between the parties, or effectively charged to the seller through the purchase price. The initial retention is commonly funded 50/50, with the seller's half held in a small escrow that replaces the traditional 10% holdback.
- Does RWI replace the escrow in an M&A deal?
- Mostly. Deal-terms data on private-target transactions shows median indemnification escrows of about 10% of transaction value without RWI versus about 0.5% with it. Sellers typically still fund a small escrow covering their share of the policy retention, and separate escrows for purchase price adjustments or specific known issues remain common even on insured deals.
- What is the minimum deal size for reps and warranties insurance?
- Insured transactions typically start around $30 million in deal value. Carriers have pushed minimum policy limits down to roughly $3 million to $5 million, but below about $20 million in enterprise value the fixed underwriting fee and minimum premium usually make RWI uneconomical, so smaller deals still rely on a traditional seller indemnity secured by an escrow or holdback.
Considering a sale in the next few years? See what a prepared process looks like.
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