Glossary
Representations and Warranties Insurance (RWI)
Representations and warranties insurance (RWI) is an insurance policy that covers losses arising from breaches of the seller's representations and warranties in an acquisition agreement. Most policies are bought by the buyer, allowing the buyer to recover from the insurer rather than the seller and reducing the size of escrows or indemnities.
Formula
Example
A buyer acquires a company for $100,000,000 and buys an RWI policy with a $10,000,000 limit and a $1,000,000 retention. After closing, the buyer discovers undisclosed tax liabilities that breach a representation and cause $4,000,000 of loss. The buyer absorbs the first $1,000,000 under the retention, and the insurer pays the remaining $3,000,000, well within the policy limit.
How it is used in underwriting
RWI has become common in private equity and strategic acquisitions because it shifts indemnity risk from the seller to an insurer. Sellers get a cleaner exit with less money held back, and buyers get a creditworthy counterparty for claims without suing the management team they may be retaining. Underwriters at the insurer review the buyer's diligence reports, including financial, tax, legal and quality of earnings work, and they exclude areas where diligence was thin. For buyers and their lenders, the policy is part of the risk allocation analysis and affects how much escrow or holdback is negotiated.
RWI does not cover everything. Standard exclusions include matters known to the buyer before closing, forward-looking statements and projections, purchase price adjustments such as working capital true-ups, certain environmental or pension issues, and deal-specific risks identified in diligence. It also does not cover poor business performance that does not result from a breached representation. Buyers sometimes negotiate a separate special indemnity or escrow for known issues. The quality of diligence directly affects coverage, so an underwriter who skips work in an area may find that area excluded from the policy.
Typical benchmarks
Policies are often written with limits around 10% of enterprise value and retentions around 1% of enterprise value or less, with pricing that moves with insurance market conditions.
Frequently asked questions
Who pays for representations and warranties insurance?
The buyer usually purchases the policy and is the insured party, but the premium is often shared or negotiated as part of the purchase price. In competitive auctions, sellers may require bidders to use RWI so the seller can minimize post-closing indemnity obligations and escrows.
What does R&W insurance not cover?
Common exclusions include issues the buyer knew about before closing, projections and forward-looking statements, working capital and other price adjustments, and specific risks the insurer identifies during its underwriting, often including certain environmental, pension or wage and hour matters. Buyers address excluded risks with special indemnities or escrows.
How does RWI affect escrow and indemnity?
With RWI, sellers often agree to a much smaller indemnity escrow, sometimes only a portion of the policy retention, or none at all. The buyer's main recourse for breaches shifts to the insurer. Fraud claims against the seller are typically preserved regardless of the policy.
Related terms
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