By Benzinga Contributors
Copyright benzinga
Why Businesses Need Protection in M&A Deals
Mergers and acquisitions (M&A) can create tremendous opportunities for growth, expansion, and efficiency. But they also carry risk. One of the most significant risks comes from the representations and warranties (reps and warranties) made by the seller during the deal. If those promises turn out to be inaccurate, the buyer could face financial losses or legal exposure.
That’s where Reps and Warranties Insurance (RWI) comes in. This specialized form of coverage helps both buyers and sellers manage transaction risk, smooth negotiations, and protect their financial interests. Over the past decade, RWI has grown from a niche product to a mainstream tool in middle-market and large-scale M&A deals.
This article will explain in detail what RWI is, how it works, who benefits from it, and why it has become a vital part of modern deal-making.
Understanding Representations and Warranties
Before diving into the insurance product, it’s important to understand the foundation: what are reps and warranties?
Representations: Statements of fact made by the seller about the company being sold. Examples include:“The company’s financial statements are accurate.”“The company owns all its intellectual property.”Warranties: Promises about the condition of the business or its future performance. Examples include:“The company complies with all labor laws.”“There are no undisclosed liabilities.”
These assurances help the buyer evaluate the value and risk of the transaction. But if they prove untrue, the buyer may pursue damages — unless RWI steps in.
What Is Reps and Warranties Insurance?
Reps and Warranties Insurance is a type of transactional risk coverage designed to protect against losses arising from breaches of the seller’s reps and warranties in an acquisition agreement.
Buyer-Side RWI: Protects the buyer from financial losses if a seller’s reps and warranties turn out to be inaccurate.Seller-Side RWI: Protects the seller against claims made by the buyer for breaches, reducing personal or corporate exposure.
While both versions exist, buyer-side policies now dominate the market, often making up more than 90% of transactions.
How Reps and Warranties Insurance Works
Here’s how the process typically unfolds:
Negotiation PhaseBuyer and seller negotiate terms, including the reps and warranties section of the purchase agreement.Traditionally, sellers would set aside escrow funds to cover potential breaches.Insurance BiddingEither party engages brokers to obtain quotes from insurers specializing in RWI.Underwriters review deal documents, due diligence reports, and financials.Policy BindingOnce bound, the policy covers specified reps and warranties for a defined period (often 3–6 years).Claims ProcessIf a breach is discovered post-closing, the insured party files a claim.The insurer pays damages up to the policy limit, subject to exclusions and deductibles.
This process helps reduce the need for contentious escrow negotiations and gives both sides greater certainty.
How Does Reps and Warranties Insurance Work in M&A Deals?
In practical terms, reps and warranties insurance works as a backstop to the purchase agreement. The mechanics are straightforward but critical for buyers, sellers, and investors to understand.
Policy Placement – During negotiations, the parties engage a broker to present the deal to insurance underwriters.Underwriting – The insurer reviews due diligence reports, financial statements, and disclosures.Policy Structure – Limits, retention (deductible), and coverage periods are set.Closing – The policy activates at deal close.Post-Closing – If a breach surfaces, the insured files a claim.
The entire process often takes two to three weeks and runs in parallel with due diligence and contract drafting.
What Does Reps and Warranties Insurance Cover?
Buyers and sellers alike want clarity on what the policy actually protects against. Coverage is designed to respond to unknown breaches — not issues discovered before closing.
Common Inclusions
Financial Accuracy – Misstatements in balance sheets or income statements.Tax Liabilities – Undisclosed obligations or compliance failures.Employment and Labor – Violations of wage laws, benefits obligations, or misclassification.Intellectual Property – Ownership disputes or undisclosed third-party claims.Contracts – Breaches of material customer, supplier, or vendor agreements.
Common Exclusions
Known risks identified in due diligence.Forward-looking statements such as projections or forecasts.Certain environmental and pension liabilities.Fraudulent misrepresentation by the seller.
This clear divide helps ensure RWI protects against unforeseen issues, not foreseeable ones.
Who Pays for Reps and Warranties Insurance?
One of the most common Google-searched questions around RWI is: “Who pays for it — buyer or seller?”
Buyer-Paid Policies: Most common in today’s market. The buyer pays the premium but gains broader protection.Seller-Paid Policies: Sometimes offered in competitive auctions to sweeten the deal and limit buyer risk.Shared Costs: In some cases, the parties split the premium or share retention (deductible) costs.
Market trends show that buyers assume the cost in over 80% of U.S. middle-market deals, making it the default expectation.
Reps and Warranties Insurance vs. Indemnification
Another frequent search is: “How does RWI compare to indemnification?”
This side-by-side comparison highlights how RWI can replace — or at least reduce — the need for traditional indemnification.
When Do You Need Reps and Warranties Insurance?
Not every transaction requires RWI, but it is increasingly expected in competitive markets.
Situations Where It’s Common
Private Equity Transactions – Firms rely on RWI to protect funds and speed exits.Middle-Market Deals – Companies valued at $30M–$500M often benefit most.Cross-Border Deals – Where legal complexity increases risk.Family-Owned Business Sales – Sellers want clean exits with minimal liability.
If a deal involves multiple bidders, high enterprise value, or unknown liability risk, RWI is almost always on the table.
Claims Under Reps and Warranties Insurance
Skeptical buyers often ask: “Do insurers actually pay claims?”
The data says yes. Industry reports suggest:
1 in 5 policies results in a claim.Claim payments average $3M–$5M, with larger deals seeing $10M+ payouts.Top Claim Types: Tax liabilities, financial misstatements, and contract breaches.
While claims can be complex, insurers have a track record of honoring valid ones, which has built market trust.
Key Benefits of Reps and Warranties Insurance
RWI is not just about risk transfer; it reshapes how deals get done.
Protects Against Financial Losses: Coverage for unknown liabilities that surface after closing.Strengthens Bids: Offering to use RWI can make a bid more competitive by reducing seller liability.Extends Coverage: Policies often provide longer survival periods than traditional escrows.
For Sellers
Cleaner Exits: Instead of tying up 10–15% of proceeds in escrow, sellers keep more at closing.Reduced Liability: Limits the risk of post-closing disputes or clawbacks.Attracts Buyers: Especially in competitive auctions, offering RWI can increase deal certainty
Cost Structure of Reps and Warranties Insurance
The cost of RWI policies depends on several factors:
Premiums: Typically 2%–4% of the insured limit.Retention/Deductible: Usually 1% of the enterprise value, often shared between buyer and seller.Underwriting Fees: Paid upfront, usually $25,000–$50,000.
While costs are significant, they are often offset by reduced escrow requirements and smoother negotiations.
Practical Example
Imagine a private equity firm acquires a $100M manufacturing company.
Without RWI: Seller might need to place $10M–$15M in escrow for 18–24 months.With RWI: Seller keeps nearly all proceeds upfront, while the buyer gets a $20M RWI policy covering breaches.
This creates a win-win structure, facilitating deal closure and minimizing disputes.
Why Reps and Warranties Insurance Matters in Today’s Environment
In a business climate where speed, certainty, and capital efficiency are critical, RWI provides:
Confidence for buyers to proceed without fearing hidden liabilities.Security for sellers to walk away with minimal ongoing obligations.A deal-making tool that bridges gaps in negotiation.
For staffing firms, financial institutions, and corporate strategists alike, understanding RWI is becoming essential.
Market Growth and Trends
The use of RWI has surged in recent years:
Market Expansion: In the U.S., the RWI market has grown into a multi-billion-dollar segment of the insurance industry.Deal Size: While once reserved for billion-dollar deals, policies are now common in middle-market transactions (deals as low as $30M–$50M).Industry Adoption: Technology, healthcare, manufacturing, and private equity are among the heaviest users.Pricing: Premiums typically range from 2%–4% of the coverage limit, though rates fluctuate with market demand.
This growth shows that RWI is no longer optional — it’s often expected in modern M&A.
FAQs on Reps and Warranties Insurance
What is the typical coverage limit?Usually 10%–30% of deal value.
How long does coverage last?Three years for general reps, six years for fundamental reps (tax, title, etc.).
Is it worth the cost?In competitive M&A markets, yes — it enables cleaner exits and smoother negotiations.
Can sellers still be liable?Yes, but RWI significantly reduces their exposure.
Does reps and warranties insurance replace escrow?Not entirely. While RWI often reduces the need for large escrow accounts, some escrow may still be required to cover excluded risks or deductibles.
Can small businesses use reps and warranties insurance?Yes. While originally designed for large transactions, insurers now offer policies for deals as small as $10–$20 million in enterprise value.
How long does it take to secure a policy?On average, two to three weeks. However, in competitive deals with strong diligence, policies can be bound in under 10 days.
What industries use RWI the most?Private equity, healthcare, technology, manufacturing, and energy are leading sectors due to higher deal activity and liability complexity.
Is reps and warranties insurance tax deductible?Premiums are typically treated as a transaction cost and may be deductible, but treatment can vary by jurisdiction. Companies should confirm with their tax advisors.
