Mark Reinhardt, Best Best & Krieger LLP
Representations and warranties insurance (RWI) has moved from a niche product used primarily by private equity buyers to a mainstream feature of middle-market M&A transactions. Indeed, a recent report from an Am Law 200 firm states that nearly thirty underwriters now offer RWI and that, in its 2024 deal set, the product was used in 89 percent of transactions with enterprise values between $100 million and $1 billion, and in 63 percent of deals with enterprise values between $25 million and $100 million. For those advising clients on acquisitions or exits of sufficient value, understanding how RWI works, and how it has reshaped deal terms and purchase agreement provisions in recent years, is essential.
What is RWI?
RWI is a specialized insurance product that covers losses arising from breaches of representations and warranties in a purchase agreement. Instead of relying solely on a seller’s indemnification obligations, a buyer can recover covered losses from an insurer. In a typical transaction, the buyer purchases the policy (though sell-side policies are also used in certain situations). The policy effectively shifts a portion of post-closing risk from the contracting parties to a third-party insurer.
RWI generally does not eliminate the need for buyer due diligence or negotiated representations and warranties, as insurers rely heavily on the buyer’s diligence process and the negotiated agreement when underwriting coverage. However, RWI can significantly reduce deal friction in negotiating risk allocation between the contracting parties.
In some cases, a buyer can even obtain insurance coverage for representations, warranties, and indemnities that the buyer wants but the seller is unwilling (or unable) to give in the transaction documents, for example, in distressed M&A transactions. This form of insurance is commonly known as “synthetic warranty and indemnity (W&I) insurance.” A synthetic W&I policy “deems” a set of representations and warranties to have been given in the transaction documents, and the buyer’s recourse for any breach or inaccuracy of such deemed representations or warranties is solely against the insurer, not the seller
RWI can benefit both buyers and sellers
For sellers with sufficient deal leverage and transactions with sufficient enterprise value (usually over $20 million), it is becoming increasingly common to require the buyer to obtain an RWI policy because it gives the seller a cleaner exit and faster access to proceeds.
- Reduced escrow and indemnity exposure. In a traditional M&A deal, sellers place a portion of the purchase price in escrow, or allow the buyer to “holdback” a portion of the purchase price, to secure indemnification obligations. With RWI, that escrow is often significantly reduced (or eliminated), because the buyer looks primarily to the insurer for recovery.
- Greater certainty of proceeds. By minimizing or eliminating post-closing indemnity exposure, sellers can distribute proceeds more quickly and with greater confidence that they will not be clawed back.
- Reduced post-closing friction. When claims are directed to an insurer rather than the seller, the likelihood of having to deal with post-closing disputes and the strain they place on ongoing relationships where the seller remains involved in the business is reduced.
An important caveat to these seller benefits is that they can be significantly undermined if the insurer is allowed to pay the buyer’s claim and then pursue the seller by subrogation. As such, sellers and their counsel often insist on reviewing and approving the RWI policy’s non-subrogation provisions, even where the buyer is the one obtaining the policy. In a typical buyer-side RWI policy, insurers often agree that, except in narrowly defined circumstances such as actual fraud by the seller, the insurer will have no right of recourse against the seller after paying a covered claim. However, sellers and their counsel may have to request these non-subrogation provisions if the insurer’s form does not include them by default.
Buyers can also obtain significant advantages from RWI, particularly in competitive auction processes.
- Enhanced bid competitiveness. Buyers can offer more seller-friendly terms, such as reduced escrows and indemnity caps, without sacrificing protection, making their bids more attractive.
- Broader and more reliable recovery. RWI policies may provide coverage that exceeds the indemnities a seller would otherwise agree to, both in scope and duration. In addition, buyers gain access to a creditworthy insurer rather than relying on the seller’s post-closing solvency.
- Facilitation of deals with limited seller indemnity. RWI is especially useful in transactions involving financial sponsors, dispersed shareholders, or distressed sellers who are unwilling or unable to provide robust indemnification.
Both buyers and sellers (and their respective deal counsel) can also benefit from the ways RWI helps bridge gaps on contentious indemnity issues such as caps, baskets, materiality scrapes, sandbagging, and survival periods. In some cases, deals that might otherwise stall over these terms can move forward with RWI.
Impact on purchase agreement terms
The rise of RWI has materially reshaped several core M&A deal terms over the past fifteen years.
- Decline in escrow holdbacks. One of the most visible changes is the reduction in escrow size and frequency. In RWI-backed deals, escrow amounts have dropped dramatically, often to around 0.5 percent of transaction value, compared to significantly higher levels in non-RWI transactions. More recent data confirms this trend, with indemnification escrows in RWI deals averaging roughly 1 to 2 percent of transaction value.
- Lower indemnity caps. RWI has also driven down indemnity caps. Sellers in insured deals often negotiate caps in the low single digits as a percentage of transaction value, compared to materially higher caps in traditional deals.
- Shorter survival periods. Because the insurer provides coverage for a defined period (often several years), sellers frequently negotiate shorter survival periods for representations and warranties.
- Increased use of “no-survival” structures. In some transactions, sellers provide little or no post-closing indemnity for general representations, with the RWI policy serving as the primary recourse. These “no-survival” deals can streamline negotiations and accelerate closing.
RWI has also affected
- materiality scrapes (now widely accepted, in part because insurers favor them);
- sandbagging provisions (less heavily negotiated due to policy exclusions for known breaches); and
- separate escrows for purchase price adjustments (increasingly common as indemnity escrows decrease).
Overall, RWI has shifted risk allocation away from bilateral negotiation and toward insurance-backed solutions.
RWI pricing
RWI pricing has become more competitive over time. Current premiums typically fall in the range of approximately 2.5 percent to 4 percent of the policy limit (for example, the premium for $10 million in coverage may cost between $250,000 and $400,000), with many U.S. deals clustering around the lower end of that range.
In addition to the premium, buyers should expect an underwriting fee (often $40,000 to $50,000) and coverage limits that are commonly set at 10–15 percent of enterprise value. These costs are usually treated as transaction expenses and are often borne by the buyer, though cost-sharing arrangements are negotiable.
RWI retention and deductible
RWI policies include a retention (similar to a deductible), typically around 1 percent of transaction value. Historically, sellers covered the first half of the retention amount (often through an escrow), with the buyer paying the second half of the retention. However, modern deals increasingly shift the entire retention to the buyer and eliminate seller participation altogether, particularly in competitive auctions or “no-survival” structures.
What kinds of deals are best suited for RWI?
RWI is particularly well-suited for
- auction processes where buyers seek to differentiate bids;
- transactions involving private equity sellers requiring a clean exit;
- deals with numerous or passive shareholders;
- cross-border transactions with enforcement concerns; and
- situations where ongoing relationships between buyer and seller are anticipated.
While there is no bright-line rule, RWI is generally more cost-effective for transactions above $20 million to $50 million. Below that range, premiums and underwriting costs may be disproportionate to the benefits, and insurers may be less willing to participate.
Deal factors that may limit RWI usefulness
Despite its advantages, RWI is not appropriate for every transaction.
- Smaller deal sizes. As noted above, cost considerations can outweigh benefits in lower-value deals.
- Known risks. RWI typically excludes known issues, making it less useful where diligence reveals material problems.
- Complex or high-risk industries. For certain risks, such as environmental liabilities or specific regulatory exposures, the insurer may insist on significantly narrowing or excluding certain coverage by including “deemed amendments” in the RWI policy to the representations and warranties contained in the purchase agreement being insured.
Additionally, RWI generally does not cover covenant breaches or purchase price adjustments.
Recent trends in RWI
Over the past five years, RWI costs have come down dramatically from 2021 highs, when premiums often ranged between 4 percent and 5 percent of enterprise value, to premiums as low as 2 percent in 2024. But costs have begun rising again slowly, with 2025 premiums generally hovering in the 2.5 percent to 3.5 percent range as of the end of 2025.
If there is a single development that has most changed the practical use of RWI in the past five years, it may be the increase in the amount and severity of claims being made on RWI policies. Aon said in its 2025 Transaction Solutions Global Claims Study that it handled more than 1,600 global transaction-insurance claims and secured $1.75 billion in recoveries for clients, including more than $1.4 billion in North American R&W recoveries through Q4 2024 and more than $300 million paid in 2024 alone. Euclid said in its 2024 claims study that severe claims were on the rise and that claims experience should become an increasingly important factor in deciding which RWI carrier to use. WTW then said in their 2026 claims report that in 2025 its North American clients recovered more than $150 million, with an average resolved claim payment of about $7.3 million, or roughly half of the applicable policy limit. Aon and WTW also point to the same loss drivers: financial statements, material contracts or customer issues, and compliance-with-laws breaches account for a disproportionate share of serious paid claims.
A further major development is that RWI is no longer confined to classic control acquisitions. In 2025, WTW reported that 2024 brought new coverage options for minority investments and broader use of RWI in distressed and bankruptcy deals. In a separate 2024 note, WTW said some minority investors can now obtain non-prorated coverage on a case-by-case basis, departing from the traditional practice of prorating recovery to the investor’s post-closing equity stake. Additionally, although synthetic W&I insurance remains primarily associated with distressed transactions, it is now also being used in asset-heavy sectors such as energy and in mainstream M&A.
Lastly, and perhaps most durably, deal teams now integrate RWI earlier, with parties thinking about limits, retentions, exclusions, and underwriting timing during diligence scoping and term-sheet negotiations. As the market has matured, RWI has evolved from being a bolt-on policy to being part of the way sophisticated buyers scope diligence, draft agreements, and choose counterparties from the outset.
Conclusion
Representations and warranties insurance has fundamentally reshaped the M&A landscape over the past decade. For those advising clients in M&A transactions involving enterprise values of $20 million or more, RWI is a central tool in modern dealmaking, with implications for drafting, negotiation strategy, and client counseling. Understanding when RWI adds value (and when it does not) is a critical part of delivering effective transactional advice in today’s market. The next chapter in RWI will likely be less about whether the product is available and more about where it is worth using, how it is structured, and which insurers have earned the market’s trust when a claim arrives. ♦