The undisclosed contract term
After closing, the buyer discovers a key customer contract allowed the customer to terminate on a change of control, contrary to the seller's rep.
R&W insurance can cover the buyer's resulting loss, above the retention.
Transactional Risk Insurance
Representations & warranties insurance, so the deal closes clean.
Representations and warranties (R&W) insurance, sometimes called warranty and indemnity insurance, protects against financial loss when a seller's representations in a purchase agreement turn out to be inaccurate in ways no one knew about at signing.
What R&W insurance covers.
In most deals the buyer buys the policy, and it stands in for much of the seller's indemnity. Buyers get a solvent source of recovery without having to sue the sellers, who may now be their own management team. Sellers can exit with a smaller escrow and less money tied up after closing.
R&W insurance is underwritten deal by deal, alongside the buyer's diligence. The policy follows the purchase agreement, so the coverage, exclusions and retention are negotiated at the same time the deal terms are.
- Breaches of the seller's repsLoss from inaccuracies in the representations and warranties in the purchase agreement that weren't known when the deal was signed.
- General and fundamental repsOperational reps like financials, contracts and compliance, and fundamental reps like title and authority, typically with a longer policy period for fundamentals.
- Pre-closing tax indemnityUnknown tax liabilities from periods before closing, where included in the policy.
- Defense costsCosts to pursue or defend a covered breach claim, as part of covered loss.
- Buy-side or sell-sideMost policies protect the buyer. Seller-side policies protect sellers against claims the buyer brings against them.
What it typically doesn’t cover
- Known issuesBreaches the deal team knew about before signing or closing are excluded.
- Diligence findings and deal-specific exclusionsIssues found in diligence, and high-risk areas the insurer carves out for that deal, may need separate coverage.
- Purchase price adjustments and forward-looking statementsWorking capital true-ups, projections and covenants are generally not covered.
- Certain standard exclusionsCommonly excluded areas include underfunded pensions and some environmental or asbestos matters. Specific tax positions can sometimes be placed on a tax liability policy.
Coverage descriptions are general summaries. Actual coverage is governed by the terms, conditions and exclusions of the policy issued. Availability varies by state and carrier.
Real-world examples
What a claim can look like.
Claims rarely look dramatic at the start. They usually begin with an ordinary day, an email or a phone call.
The compliance issue
A post-closing review finds the target had been misclassifying workers, breaching the seller's compliance rep.
The policy can respond if the issue was unknown at signing and not excluded.
The family sale
Founders selling a family business want their proceeds without a large escrow held back for years.
A buy-side policy can replace much of the seller indemnity, so less is held back.
Examples are illustrative. Whether a claim is covered depends on the facts and the terms, conditions and exclusions of your policy.
Often paired with
Directors & Officers (D&O) InsuranceProtects company leaders and the organization against claims alleging wrongful management decisions or actions.Commercial Crime InsuranceCoverage for financial losses resulting from employee theft, forgery, fraud and other covered criminal acts.Cyber Liability InsuranceFinancial protection against data breaches, ransomware, network security incidents and other cyber-related exposures.Intellectual Property (IP) Infringement InsuranceProtection against certain claims involving patent, trademark and copyright infringement.Questions
Common questions about R&W insurance, answered.
Who usually buys R&W insurance?
Most often the buyer. The seller may agree to share the cost or the retention as part of the deal terms. Seller-side policies exist but are less common.
Does R&W insurance cover issues found in due diligence?
No. The policy covers unknown breaches. Issues found in diligence are typically excluded, and may be handled with a specific indemnity, a price adjustment or a separate contingent or tax liability policy.
How long does it take to put R&W insurance in place?
Underwriting runs alongside the deal. Underwriters review the purchase agreement and diligence reports, hold an underwriting call with the deal team, and the policy is typically bound at signing.
Is my deal big enough for R&W insurance?
R&W insurance has become common in mid-sized and smaller deals, not just large private equity transactions. Minimum premiums and retentions vary by market, so we'll tell you early whether it makes sense for your deal.
How much does R&W insurance cost?
R&W premiums are based on the limit purchased, which is usually tied to deal size, along with the target's industry and risk profile, the quality of diligence, the retention and any tax or other specific exposures. We compare options across our carrier relationships so you see real prices for your business, not an average.
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