Representations & Warranties Insurance
Also known as: RWI, Reps & Warranties Insurance, Warranty and Indemnity Insurance, W&I Insurance
Representations and warranties insurance (RWI) is a specialty transactional product that backstops the promises a seller makes in an M&A purchase agreement — the 'reps and warranties' about financial statements, taxes, contracts, litigation, compliance, and the condition of the business. If one of those statements turns out to be inaccurate and the buyer suffers a loss, RWI lets the buyer collect from the insurer rather than clawing money back from the seller through an escrow or lawsuit. This transforms a contentious post-closing indemnity fight into an insurance claim, which is why RWI has become standard in private-company deals.
For a business buyer or seller, RWI matters because it changes deal economics and relationships. Sellers can walk away with more of their proceeds instead of leaving a large indemnity escrow tied up for years, making their bid more attractive. Buyers gain a solvent, deep-pocketed counterparty (the insurer) and can offer sellers a cleaner exit to win competitive auctions. Most policies are buy-side, naming the acquirer as insured, and coordinate with any residual hold-harmless and indemnity provisions that survive closing. The result is often a smoother negotiation because neither side is fighting over a shrinking escrow.
A practical nuance: RWI is not a cure-all. Policies carry a retention (a deductible, typically around 0.5%–1% of deal value that steps down over time), and they exclude known issues surfaced in due diligence, purchase-price adjustments, and certain specialized risks that must be covered by separate products. Pricing usually runs a few percent of the coverage limit as a one-time premium. Underwriting requires the insurer to review the buyer's diligence, so a thin diligence process can lead to broad exclusions. Buyers should map exactly which reps are covered, the survival period, and how the retention erodes — and confirm whether a separate tax-liability or litigation policy is needed for identified risks.
Real-world scenario
Northbridge Capital, a lower-middle-market private-equity firm, agreed to acquire Larkfield Analytics, a B2B SaaS company, for an enterprise value of $42,000,000. Rather than force the sellers to leave $4,200,000 (10% of the deal) sitting in an escrow account for two years to back their representations, both sides agreed to a buyer-side Representations & Warranties policy. Northbridge bought a limit of $4,200,000 with a policy retention (its own out-of-pocket layer, similar to a self-insured retention) of $420,000 — 1% of enterprise value. The premium came to $126,000 (a 3.0% rate on limit), plus a $35,000 underwriting fee and $18,900 in surplus-lines taxes, since the policy was placed through an excess & surplus carrier.
Fourteen months after closing, Northbridge discovered that Larkfield had understated a state sales-tax liability and had misrepresented an anchor customer's renewal, a breach of the seller's reps that produced a loss of $1,300,000. Northbridge tendered the claim. After the retention — which had already stepped down from $420,000 to $210,000 at the 12-month mark under the policy's built-in erosion feature — the insurer paid $1,090,000 and separately reimbursed $95,000 of outside-counsel indemnity and defense costs.
Because the risk sat with the insurer, the sellers only had to escrow $210,000 instead of $4,200,000, freeing roughly $3,990,000 at closing, and Northbridge avoided a bruising clawback lawsuit against the management team it now employed. The all-in cost of that protection — about $179,900 — bought a cleaner deal and a faster close.
How it affects your premium
R&W insurance is priced as a rate-on-limit, and underwriters weigh deal-specific risk far more heavily than in commodity commercial lines. The main cost drivers are:
- Enterprise value and limit purchased. Limits are typically set at 10% of deal value; the larger the transaction, the larger the limit and premium, though the rate-on-limit often falls on bigger, better-diligenced deals.
- Rate-on-limit. Most policies price between 2.5% and 4% of the limit. Competitive markets and clean deals push the rate down; hard markets and thin diligence push it up.
- Retention level. A lower retention (the buyer's uninsured layer, akin to a self-insured retention) means the insurer is on risk sooner, so it raises premium; retentions that erode over time add cost.
- Industry and target complexity. Healthcare, financial services, and heavily regulated sectors carry surcharges; simple manufacturing or SaaS with recurring revenue prices more cheaply.
- Quality of due diligence. Underwriters read the buyer's financial, legal, tax, and IT diligence reports. Gaps trigger exclusions or higher pricing.
- Underwriting fee. A flat diligence fee of roughly $30,000–$50,000 is charged on top of premium regardless of deal size.
- Placement channel and taxes. Nearly all R&W is written by excess & surplus carriers, so surplus-lines taxes and stamping fees add to the total.
Common misconceptions
Myth: R&W insurance covers any problem the buyer discovers with the acquired company after closing.
Reality: It only responds to breaches of the seller's specific representations and warranties in the purchase agreement — not to known issues, purchase-price adjustments, or matters carved out by the policy's exclusions (such as certain tax positions, pension underfunding, or known environmental liabilities).
Myth: Because it is transaction insurance, R&W is written on an occurrence basis like general liability.
Reality: R&W policies respond to breaches discovered and reported inside fixed multi-year terms — typically 3 years for general reps and 6 years for fundamental and tax reps — much closer to a claims-made structure than an occurrence policy.
Myth: The insurer can chase the sellers to recoup whatever it pays out on a claim.
Reality: In a standard buy-side policy the carrier waives its subrogation rights against the sellers except in cases of actual fraud, which is precisely why sellers accept a smaller escrow in exchange for the policy.
Frequently asked questions
Who buys R&W insurance — the buyer or the seller?
How much does a Representations & Warranties policy cost?
What isn't covered by R&W insurance?
How is R&W insurance different from D&O insurance?
How long does R&W coverage last?
Sources cited
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