Reps and Warranties Insurance: When and How to Use It

Introduction: Insurance as a Strategic Deal Tool

M&A used to be a world of pure buyer-seller negotiation. Today, reps and warranties insurance (RWI) has become a common third party in the room. As a CFO who has structured deals both with and without RWI, I have come to see it not just as a form of risk transfer, but as a tool for speeding negotiation, preserving relationships, and unlocking cleaner exits.

What RWI Covers and What It Does Not

RWI covers losses arising from breaches of the seller’s representations and warranties. It allows the buyer to claim against the insurer instead of the seller. This includes:

• Financial misstatements
• Tax liabilities
• Compliance failures
• IP ownership disputes

It does not typically cover:

• Purchase price adjustments
• Known issues disclosed during diligence
• Forward-looking statements
• Pension underfunding

In a tech acquisition, our RWI policy covered a post-close sales tax liability that surfaced three months later. The seller avoided litigation, and we recovered our loss.

When to Use RWI

RWI is particularly valuable when:

• The seller is a PE firm seeking a clean exit
• The buyer wants to reduce escrow or holdback
• The deal involves cross-border legal complexity
• The parties want to preserve the commercial relationship post-close

In one carve-out acquisition, the seller wanted a limited indemnity tail. We used RWI to bridge the gap, with only a $1 holdback.

How RWI Changes Deal Dynamics

RWI shifts risk from seller to insurer. But more importantly, it:

• Speeds negotiation by reducing indemnity debates
• Lowers tension between parties
• Makes the seller’s exit cleaner and faster
• May raise scrutiny during diligence by insurers

In a life sciences deal, the presence of RWI let us focus on operational synergies rather than legal battles.

Process and Cost Considerations

Securing RWI involves:

• A non-binding indication (NBI) phase
• Underwriting calls and diligence review
• Final pricing and binder issuance

Typical premiums range from 2.5% to 4% of coverage limits, with retention levels around 1% of enterprise value.

We once paid $450K for a $20 million policy. The peace of mind and closing speed it enabled justified the cost.

Drafting Considerations

To maximize RWI value:

• Ensure robust diligence and document it
• Draft representations with insurer input in mind
• Prepare a comprehensive disclosure schedule
• Align policy exclusions with deal-specific risks

Our legal team now involves the insurer early, ensuring reps are underwritable and exclusions are scoped narrowly.

Conclusion: Insurance Is Not a Crutch. It Is a Lever.

RWI is not about avoiding diligence. It is about facilitating trust and accelerating closure. When used strategically, it aligns interests, accelerates timelines, and reduces post-close friction. For CFOs navigating deals with complexity, RWI is no longer a luxury. It is a standard tool in the modern M&A toolbox.

Insight

There was a time when the idea of insuring a seller’s promises in a deal sounded like overkill. Now, I rarely close a deal without at least evaluating reps and warranties insurance. As a CFO, I consider it part of my fiduciary responsibility to assess risk allocation tools, and RWI has grown into one of the most effective instruments to both de-risk the deal and streamline the negotiation.

In its essence, RWI substitutes the insurer’s capital for the seller’s when a breach of representation occurs. That single shift does something profound to the psychology of deal-making. The buyer gets recourse. The seller gets finality. And the deal team gets to spend less time haggling over indemnity structures and more time planning integration.

The kinds of risks RWI covers are exactly the types of exposures that keep deal teams awake at night: inaccuracies in financial statements, unrecorded tax liabilities, and regulatory breaches that only come to light post-close. But it is important to understand the exclusions. RWI is not a catch-all. Known issues uncovered in diligence are always excluded. Pension underfunding, environmental risks, and forward-looking representations are also typically carved out. That makes the quality of diligence and the specificity of reps even more important.

We once had a deal where the seller was a highly reputable private equity firm. They wanted to distribute proceeds quickly and resist any form of escrow. We opted for RWI with a one-dollar holdback. It cost us $425,000 in premium for a $20 million policy, but the deal closed two weeks earlier, the relationship remained intact, and we later recovered nearly $2 million in an indemnified sales tax issue. That experience converted even the skeptics on our board.

But RWI is not a free pass. The underwriting process is rigorous. Insurers scrutinize diligence materials, and the process often reveals where your diligence is light. In one transaction, the insurer flagged our IP diligence as inadequate, which led us to revisit a set of licenses that turned out to have transfer restrictions. That single flag likely saved us from post-close operational disruption. So in that sense, the insurer acts as a second set of eyes—an auditor with a very real stake in your diligence quality.

The timing of bringing in an insurer matters. In our earlier RWI deals, we approached insurers late, once the contract was nearly final. That often led to scrambling to align exclusions and re-drafting reps. Now, we bring the insurer into the process at term sheet stage, so we can shape the reps in a way that makes them insurable. That has reduced our legal rework by at least 30 percent.

Structuring the policy also requires strategic thought. The retention, or deductible, is typically 1 percent of enterprise value, and policies rarely cover more than 10 to 20 percent of the purchase price. That means RWI is best seen as complementary, not comprehensive. In one deal, we used a hybrid model: RWI for general breaches, seller escrow for known regulatory exposure, and a specific indemnity for a pending audit. That layered structure gave us total protection without overpaying on premium.

The cost of RWI has declined as the market has matured, but it is still meaningful. For a $100 million deal, expect to pay $2.5 to $4 million in premium. But compare that to the cost of a legal dispute, delayed close, or lost strategic value from a fractured seller relationship. RWI earns its keep when it enables speed and certainty.

In a recent cross-border acquisition, RWI was essential. The seller was a European family office, unfamiliar with U.S.-style indemnity norms. We bridged that cultural and legal gap with a policy that covered our major risks and required only symbolic seller exposure. It changed the tone of negotiations, allowing both sides to focus on synergy and integration rather than post-close liability.

The most valuable use of RWI, in my experience, is in preserving relationships. M&A is rarely the end of contact between buyer and seller. Whether through transitional services, joint ventures, or customer continuity, the parties often remain intertwined. RWI eliminates the friction that indemnity claims create. No one likes to call the other side six months after closing to argue over tax exposure. It is much easier to call the insurer.

But that only works if your policy is built on a foundation of precision. The reps must be clear. The disclosure schedules must be complete. The diligence must be documented. In one deal, our failure to update a disclosure schedule with a last-minute contract meant the claim was denied. That reinforced our policy of doing a final audit of disclosures 48 hours before close.

Not every deal requires RWI. In small deals or founder exits where trust is high and exposure is low, traditional indemnity may suffice. But in any deal with legal complexity, regulatory risk, or third-party capital, RWI deserves a serious look.

For CFOs, the key is understanding how RWI integrates into the financial model. The cost should be budgeted. The coverage limits should be matched to potential exposure. And the claims process should be understood. RWI may remove the seller from the line of fire, but it introduces a new counterparty—the insurer. That means your legal team must be familiar with how claims are made, substantiated, and paid.

I advise every deal team to hold a pre-close session with the insurer, legal counsel, and finance to align on exclusions, retention mechanics, and post-close claim protocols. That one-hour session often avoids weeks of confusion later.

In summary, RWI has matured into an essential instrument of modern M&A. It reduces friction, preserves relationships, and brings risk capital into the transaction in a structured way. Like any tool, it must be used thoughtfully. But when integrated properly, it becomes more than an insurance policy. It becomes an enabler of faster, cleaner, and more confident deals.

Disclaimer: This article is for informational purposes only and does not constitute legal, tax, or financial advice. Always consult qualified advisors before making decisions involving insurance or transaction structuring.