Reps And Warranties Insurance

Reps and warranties insurance (RWI) is a crucial aspect of mergers and acquisitions (M&A), offering protection against financial losses from seller misrepresentations and breaches of seller’s representations. It transfers risk from the seller to the insurer, making deals easier and faster to close. This article explains what RWI is, its benefits for both buyers and sellers, and how to obtain it, along with key terms and processes involved.

Key Takeaways

  • RWI shifts the financial risk of M&A representation breaches from sellers to insurers, facilitating quicker deal closures and cleaner exits for sellers while providing buyers with a safety net against financial losses.
  • The RWI market has expanded significantly, with increased competition among 26 underwriters, driving down premiums and broadening coverage, particularly benefiting private company transactions in sectors like renewable energy and healthcare.
  • Obtaining RWI coverage entails a structured process, beginning with non-binding indications, followed by underwriting fees for comprehensive transaction reviews, and culminating in the binding of the policy post-closing, offering financial protection against breaches.

Understanding Reps and Warranties Insurance

RWI, also known as representations and warranties insurance or r w insurance, is a specialized insurance product designed to cover breaches of seller’s representations and warranties made in an M&A transaction. The core concept is to transfer the risk of financial loss from the seller to the insurer, which limits the seller’s liability and provides a safety net for the buyer. Known as Warranty and Indemnity Insurance in the EMEA region, this product plays a vital role in smoothing out transactions.

The main aim of RWI is to shield the buyer from financial losses that could occur due to inaccuracies in the seller’s representations about the target company. For instance, if the seller misrepresents the company’s financial health or key assets, the buyer can claim indemnification under the RWI policy. This reduces the need for extensive negotiations over representations and warranties, thereby accelerating the deal timeline. Moreover, in ‘no-survival’ deals where the seller’s representations do not survive the closing, the buyer relies solely on the RWI policy to recover losses from breaches.

Sellers also reap substantial benefits from RWI. It minimizes their liability by providing clear coverage limits and retention amounts, which reduces the risk for both parties. Additionally, it can eliminate the need for sellers to hold back sale proceeds for indemnity purposes, allowing for a cleaner and quicker exit. However, buyers should be aware that extraordinary losses from fundamental rep breaches in excess of the coverage limit may still leave them exposed.

The Evolution of the RWI Market

Over the past few years, the RWI market has seen significant growth and evolution. From a modest beginning with only a handful of underwriters, the market has expanded to include 26 active underwriters by mid-2023. This surge has led to:

  • Increased competition
  • More favorable terms
  • Lower premiums
  • Broader coverage options

One of the most significant trends has been the increasing adoption of RWI in mergers and acquisitions of privately held companies. Industries like renewable energy and healthcare have particularly embraced RWI as a standard practice. The influx of new insurers, including those led by RWI veterans, has further driven down premiums and improved policy terms. As of June 2023, standard rates for RWI stood at 2%–3% of the coverage limit, marking a return to pre-pandemic levels.

With Cover Your SaaS, we help source customized options that fit the needs of your M&A.

Key Benefits of Reps and Warranties Insurance

With numerous benefits, RWI has become an essential element in M&A transactions. Firstly, RWI reduces the need for traditional indemnification provisions, simplifying the transaction process. This not only makes the deal less complicated but also accelerates the timeline, allowing parties to close transactions more swiftly.

For sellers, RWI offers:

  • A cleaner exit by minimizing contingent liabilities, allowing them to walk away from the deal with fewer contingent liabilities
  • More willingness to provide detailed representations, knowing that the insurance will cover potential breaches
  • More extensive coverage for buyers and a quicker resolution of disputes

Buyers also stand to gain significantly from RWI. The insurance extends the time frame for discovering issues post-closing, providing an added layer of security. Moreover, RWI typically offers higher protection limits than sellers might agree to, enhancing buyer protection. The elimination of the need for escrow or holdback makes the buyer’s bid more attractive, giving them an edge over competitors.

Typical Process for Securing RWI Coverage

Obtaining RWI coverage is a process composed of a series of distinct steps, from the initial submission of underwriting materials to the final binding of the policy. The process can be broken down into three main stages: initial non-binding indication, underwriting fee and diligence fee, and finally, binding the policy. Enlisting the help of a seasoned broker early in the process is vital for effective navigation through the various insurer quotes and policy options.

The journey begins with the initial non-binding indication, where basic transaction details are collected, and insurers provide preliminary indications of interest. Next, the underwriting fee and diligence fee phase involves a thorough review of the transaction documents and financials, leading up to the final step of binding the policy.

Initial Non-Binding Indication

The process of securing RWI coverage starts with the crucial step of obtaining an initial non-binding indication. After discussing transaction details with an insurance broker, the broker collects essential information about the deal and reaches out to insurers for non-binding indications of interest.

Underwriters then provide initial indications on premium, retention, and any areas of concern at no cost during this stage of the insurance underwriting process, offering a preliminary glimpse into the potential coverage.

Underwriting Fee and Diligence Fee

The underwriting phase begins with the buyer paying an underwriting fee, typically ranging from $15,000 to $30,000. This fee covers the insurer’s initial review and the underwriting process. Additionally, there is an upfront diligence fee of $30,000–$45,000, which funds a comprehensive examination of the transaction documents, financials, and other relevant materials. Underwriters and their counsel gain access to the data room and review diligence reports and disclosure schedules as part of this thorough evaluation.

Twenty-four hours after the diligence call, underwriters provide a draft policy and any follow-up questions, ensuring that all potential risks are adequately addressed. Buyers may also negotiate clauses requiring the seller or its stockholders to bear some portion of the insurance policy costs and retention, further mitigating their financial exposure.

Binding the Policy

The final step in the RWI process is binding the policy, which typically occurs 10 to 15 days after closing, once all necessary information and payments are received. At this juncture, the insurance policy is formally issued, providing the buyer with the much-needed financial protection against breaches of representations and warranties.

Common Terms and Exclusions in RWI Policies

Understanding the specific terms and exclusions that come with RWI policies is essential. Generally, RWI only covers breaches of representations and warranties, excluding covenant breaches and other payment obligations. This means that if there are any adjustments to the purchase price post-closing, cover purchase price adjustments will not be included in the RWI policy.

Standard exclusions in RWI policies often include known or expected breaches, net operating losses (NOLs), and forward-looking statements. Additionally, seller fraud is typically excluded in sell-side RWI policies. It’s essential to thoroughly understand the specific policy language offered by the insurer, as the outcomes of claims can significantly depend on these details.

Claims Handling Under RWI Policies

The process of handling claims under RWI policies is well-structured. Insured parties must notify the insurer of any breaches or potential financial losses that could impact the deductible or trigger a claim. This prompt notification is critical to ensure that the insurer is aware of the issue and can begin the review process.

Once a claim is filed, the insurance company will assess it to confirm coverage and determine the extent of the loss. If the loss is determined to be covered, the insurer has the option to either reimburse the insured or to make the payment directly to the third party on behalf of the insured. This provides flexibility in how the insurer addresses the claim. Insurers typically have participation and consent rights when it comes to litigating and settling third-party claims against the insured.

RWI brokers play a vital role in assisting the insured during the claims process and negotiating payouts from the insurer.

Comparing Escrows and RWI

Both Escrows and RWI are mechanisms employed to handle indemnification risk in M&A transactions, though they have significant differences in their approaches and benefits. Traditional escrows involve holding back a portion of the sale proceeds to cover potential indemnification claims. While this method provides a straightforward way to manage risk, it ties up funds that could otherwise be used by the seller.

In contrast, RWI transfers the indemnification risk from the seller to the insurer, allowing the seller to receive most of the sale proceeds at closing. This not only makes the transaction more attractive to sellers but also helps maintain positive relationships in ongoing deals by shifting the risk to a third party. Buy-side RWI is particularly advantageous as it minimizes the need for a holdback or escrow, simplifying the transaction and providing greater security for the buyer.

Addressing RWI Coverage Gaps

While RWI offers numerous benefits, it does have coverage gaps that must be addressed for a comprehensive risk management approach. One effective strategy is to use primary insurance policies to cover specific risks that RWI does not address. This approach ensures that all potential liabilities are adequately covered, providing a safety net for both buyers and sellers.

RWI policies often exclude certain types of risks, such as covenant breaches and known issues. Therefore, it’s crucial to identify these gaps early in the transaction process and employ additional risk management strategies to mitigate them. By doing so, parties can achieve broad coverage and greater peace of mind.

Choosing the Right RWI Insurer

Choosing the appropriate RWI insurer is a pivotal part of the M&A process. Factors such as coverage limits, defense costs, and the insurer’s reputation play significant roles in this decision. It’s essential to evaluate the insurer’s approach to differentiating between target-level and investor-level losses, especially in minority investment deals.

Some insurers may be more conservative and unwilling to quote minority deals, so it’s important to assess their stance on such transactions. Additionally, consider whether the insurer requires a no-claims declaration at signing and closing of the purchase agreement, particularly if seller ownership exceeds 30%.

To effectively navigate these complexities, it is key to engage a specialty broker who is well-versed in RWI and possesses the resources to manage all insurance lines and address transaction-related queries for strategic buyers.


In summary, RWI is a powerful tool that has significantly transformed the M&A landscape. By shifting the risk of financial loss from sellers to insurers, RWI simplifies transactions, accelerates deal timelines, and provides robust protection for buyers. The evolution of the RWI market has led to more favorable terms, lower premiums, and expanded coverage options, making it an increasingly popular choice in M&A deals.

Understanding the process of securing RWI coverage, the common terms and exclusions, and the claims handling process is essential for leveraging this insurance effectively. By addressing coverage gaps and choosing the right insurer, parties can ensure comprehensive risk management and smoother transactions. As the M&A landscape continues to evolve, RWI will undoubtedly remain a cornerstone of successful deals.

Frequently Asked Questions

What is Reps and Warranties Insurance (RWI)?

RWI covers breaches of representations and warranties made by the seller in an M&A transaction, transferring the risk of financial loss from the seller to the insurer.

How has the RWI market evolved in recent years?

The RWI market has evolved by experiencing significant growth, attracting more underwriters, which has resulted in lower premiums, improved terms, and expanded coverage options for smaller deals.

What are the key benefits of using RWI in M&A transactions?

Using RWI in M&A transactions offers reduced need for traditional indemnification provisions, cleaner exits for sellers, enhanced buyer protection, and accelerated deal timelines. These benefits make RWI a valuable tool in M&A transactions.

What are some common exclusions in RWI policies?

Some common exclusions in RWI policies are covenant breaches, purchase price adjustments, known or expected breaches, net operating losses (NOLs), and forward-looking statements. Be mindful of these when considering RWI coverage.

How do you choose the right RWI insurer?

When choosing the right RWI insurer, it’s important to assess factors like coverage limits, defense costs, the insurer’s reputation, and their approach to distinguishing between target-level and investor-level losses.