Representation and Warranties (R&W) Insurance
Representation and warranties (R&W) insurance protects the parties in a merger or acquisition when the representations and warranties in the purchase agreement turn out to be inaccurate. It can cover the resulting losses and let a deal close with less money held back in escrow. Terms, exclusions, and limits vary by policy and by deal.
In a business sale, the seller makes representations about the company, its finances, contracts, and compliance. If one proves false after closing, the loss can be significant. R&W insurance transfers much of that risk to an insurer.
What does R&W insurance cover?
- Losses from a breach of the seller’s representations and warranties discovered after closing.
- Defense costs tied to a covered breach, subject to the policy.
- Buy-side policies, the most common form, which pay the buyer directly, and sell-side policies, which protect the seller.
- Unknown breaches; known issues are typically excluded and handled separately in the deal terms.
Who needs it?
Buyers and sellers in a merger or acquisition, private-equity and strategic acquirers, and business owners selling a company who want a cleaner exit with less money held in escrow.
The policy is placed during the transaction, usually on a buy-side basis, and priced on the deal’s size and risk. It can reduce the indemnity escrow the parties would otherwise negotiate, helping the deal close. Because this is specialty coverage often placed in the surplus-lines market, terms and exclusions vary.
How do we help?
We work with you and your transaction advisors to understand the deal, access the specialty markets that write R&W, explain what a given policy does and does not cover, and place coverage that fits the transaction.
R&W coverage responds to breaches in a purchase agreement; claims against the acquiring company’s management fall to directors and officers. The wider program is on our business insurance page.
What does an R&W policy pay, and what does it leave with the parties?
A buy-side R&W policy pays the buyer’s loss from a breach of the seller’s representations and warranties in the purchase agreement, above a retention that is usually a percentage of enterprise value. It covers a survival period, commonly three years for general representations and six for fundamental and tax representations, that often runs longer than the agreement itself provides. It does not pay for breaches the buyer knew about at signing, for matters disclosed in the schedules, for purchase price adjustments, or for forward-looking statements. Those are the standard exclusions and they are where claims are contested. The policy also excludes the seller’s fraud as to the buyer’s recovery from the seller, while allowing the insurer to subrogate against a fraudulent seller. The scope of the representations, and whether a given breach falls inside them, is a question for transaction counsel. Our role is to place the policy against the agreement as negotiated and to make the retention, the survival period and the exclusions visible before the deal closes rather than after.
