Representation and Warranty Insurance in M&A
Representation and Warranty Insurance (R&W insurance in the US; W&I — Warranty and Indemnity insurance — in the UK and Europe) has become a standard feature of mid-market M&A transactions. It transfers the financial risk of warranty claims from the seller (or buyer) to an insurance company, fundamentally changing the risk profile of M&A deals for both parties.
What the problem is that R&W insurance solves
In a typical M&A transaction, the seller gives representations and warranties to the buyer — statements about the business that, if untrue, give the buyer the right to claim compensation. Traditionally, sellers backed these with a personal indemnity — typically supported by an escrow holding 10–20% of the purchase price for 12–18 months post-closing. This meant sellers could not cleanly exit the transaction. R&W insurance replaces the seller's personal indemnity with an insurance policy — giving the buyer a creditworthy source of recovery and allowing the seller to receive their consideration without a large escrow holdback.
How R&W insurance works
There are two structures. In a buyer-side policy (by far the most common in contemporary practice), the buyer takes out an insurance policy directly. If a warranty claim arises, the buyer claims against the insurer rather than the seller. The seller's indemnity obligation is typically limited to a 'nil recourse' position — the seller has no liability for warranty claims beyond any agreed deductible (often nominal). In a seller-side policy (less common), the seller takes out the policy and assigns the benefit to the buyer. The economics are the same but the structure differs.
What R&W insurance covers — and what it does not
R&W insurance covers unknown breaches of the representations and warranties given in the SPA — claims arising from inaccuracies in financial statements, title to assets, regulatory compliance, intellectual property ownership, and similar. It does not cover: matters disclosed in the data room or disclosure letter (which the buyer has accepted the risk of); known issues (warranty insurance never covers known problems — it covers unknown breaches); purchase price adjustments (working capital or earn-out disputes are not covered); and fraud by the seller.
What it costs
R&W insurance is typically priced at 2–4% of the insured limit — so insuring €20M of warranty exposure might cost €500,000–€800,000. The policy has a retention (deductible) of 0.5–1% of enterprise value that sits below the insurance attachment point. The cost has declined significantly as competition among insurers has increased. In US PE transactions, the cost is typically split between buyer and seller as part of the deal economics.
Why it has become standard
R&W insurance has become standard for several reasons. For sellers, it enables a clean exit without a large escrow holdback — proceeds flow at closing rather than being retained for 18 months. For buyers, it provides a creditworthy indemnification source and simplifies post-closing relationships with the management team they need to retain. For PE funds, distributing deal proceeds at closing rather than reserving for warranty exposure is operationally important. The combination of these benefits has made R&W insurance the default structure in most US PE transactions above $50M and increasingly in European deals above €30M.
Key takeaways
R&W insurance (called W&I insurance in the UK/Europe) transfers warranty claim risk from the seller to an insurer.
Buyer-side policies are the standard structure — the buyer claims against the insurer if warranty breaches arise.
R&W insurance enables sellers to receive full proceeds at closing with minimal escrow holdback.
The policy covers unknown warranty breaches — it does not cover disclosed matters, known issues, or purchase price adjustments.
Typical cost is 2–4% of the insured limit and has become standard in US PE transactions and increasingly in European mid-market deals.
Related M&A terms
Continue building your M&A knowledge with these related guides.
Considering selling your business?
Understanding the mechanics is preparation. The conversation about your specific business — what it is worth in the current market, what a sale process would look like, and whether the timing is right — is a different one. We offer an initial consultation at no charge and without obligation. If it is not the right time, we will tell you that too.