TLDR:
Representations and Warranties (R&W) Insurance, also called Warranty and Indemnity (W&I) Insurance in Europe, is an insurance product that covers losses arising from breaches of representations and warranties in M&A transactions. Originally used in large strategic deals, R&W insurance has rapidly expanded into mid-market and now even smaller transactions, fundamentally changing M&A risk allocation.
How R&W Insurance Works
The insurance covers post-closing indemnification claims for breaches of seller representations. Two main forms exist: buy-side policies (most common, the buyer is insured—can sue the insurer directly without first pursuing the seller) and sell-side policies (rare, the seller is insured against its own indemnification exposure). Standard coverage runs 7 years for tax reps and 3 years for general reps, with policy limits typically 10-30% of enterprise value. Retentions (“deductibles”) usually range from 0.5-1% of enterprise value, often borne by the seller through a smaller traditional escrow.
Why R&W Insurance Grew
R&W insurance transforms deal dynamics: sellers can negotiate cleaner exits with minimal indemnification (sometimes “no recourse” deals where buyers look only to insurance), buyers obtain protection without depending on seller solvency, escrow amounts can be smaller and released faster, and competitive auction processes benefit from R&W being available to all bidders. The insurance market matured significantly in 2015-2025, with capacity expanding, premiums falling (1-3% of policy limit, vs. 3-5% a decade ago), and underwriting becoming more sophisticated.
Limitations and Strategic Use
R&W insurance has standard exclusions: known issues (discovered in diligence), forward-looking statements, certain environmental and pension liabilities, criminal acts, and consequential damages beyond defined limits. Coverage gaps require careful diligence and specific deal-level negotiation of warranties and indemnities. The product works best in deals where: diligence has been thorough, the warranty package is well-developed, the deal value justifies the premium (typically $20M+ transactions), and seller-buyer relationships favor clean exits over ongoing indemnification claims. Founders selling companies should consider R&W insurance as a negotiation tool to demand cleaner exit terms.