Are your clients prepared for the risks of M&A transactions? Representations and Warranties Insurance (RWI) offers a powerful solution to protect against financial losses while facilitating smoother negotiations. Discover how this innovative coverage can unlock new opportunities and safeguard deals.

In today’s complex business landscape, Mergers and Acquisitions (M&A) are pivotal moments for growth, but they often come with significant risks. Representations and Warranties Insurance (RWI) is a specialized solution designed to protect buyers and sellers in M&A transactions by covering financial losses resulting from inaccuracies in a seller’s representations. For businesses, this coverage not only safeguards against unexpected liabilities but also helps facilitate smoother negotiations and builds trust between parties. Whether you’re navigating an acquisition or advising clients on risk management, understanding the basics of RWI is essential to unlocking its full potential. Let’s dive into how this coverage works and the benefits it can offer.

HOW DOES RWI COVERAGE WORK?

Either buyers or sellers can purchase representations and warranties coverage, but 90% of the time, the insured is the buyer.¹ Typically, buyers pay the premium, but it’s negotiable with the insurer, and premiums may be split between the buyer and the seller. Conventional representations and warranties premium ranges between 3% and 7% of purchased limits. The deductible is often equal to 1% - 3% of the M&A purchase price and can also be shared.¹ After 18 months that deductible may drop to .5% of the purchase price. Coverage is generally equal to 10% - 20% of the M&A purchase price but can reach as high as 30%, with the average coverage limit hovering around 15%. This generally tracks with the escrow requirement in the transaction document.

The customary rate-on-line for accounts with no identifiable heightened risk factors is around 3%. This is written on a non-admitted basis. In summary, the cost of the policy, once the underwriting fee and the applicable state taxes/fees are applied, runs between 3.5% and 4% of the limit purchased. So, for $10M in limits the total cost would be between $350,000 and $400,000.

The buyer often pays underwriting fees to cover taxes and environmental attorneys, or other specialists needed to assist with the underwriting process. Representations and warranties coverage for small to mid-size business typically requires an underwriting fee of $25K - $35K. This is not a part of the premium and commission is not paid on the fee.

In contrast to most other financial lines, representations and warranties coverage extends back in time from the effective date of coverage. The policy term is generally 3 to 6 years, but it can be negotiated with the carrier. Three years is typically allowed for general technology, intellectual property, environmental, or healthcare representations that are often higher risk and require much more due diligence. Six years is often the chosen term for fundamental and tax representations. It’s also worth noting that the underwriting process for representations and warranties varies from most financial line procedures. When a submission is received stating the limits requested and the value and time frame of the M&A deal, a non-binding indication letter is provided before underwriting moves ahead after agreement by all parties.

HOW DOES RWI BENEFIT BUSINESSES?

While brokers often receive requests from retailers seeking Directors and Officers (D&O) coverage on behalf of privately held companies facing acquisition, D&O doesn’t address all of the nuances of an M&A scenario. There are multiple benefits of representations and warranties insurance for both the seller and buyer in an M&A deal.

For sellers, RWI can:

• Reduce or eliminate the conventional seller’s indemnity for breach of representations and warranties
• Reduce or abolish the need for an escrow holdback that diminishes proceeds at closing
• Facilitate a cleaner exit with fewer contingent liabilities, and support a quicker resolution of the acquisition agreement

Buyers benefit from:

• First-party coverage that can make the company more attractive to sellers, especially if there are multiple bids
• Lower escrow
• Potentially extended duration of representations and warranties, allowing more time to discover problems with the acquired business
• Increased amount of protection than would otherwise be available to the buyer
• Improved likelihood of prevailing in the event a claim is filed on the policy

In the end, both sides also benefit from a simpler, faster negotiation process because sellers are less concerned with negotiating the scope of representations.¹

HOW DO CLIENTS GET STARTED?

It’s not uncommon for smaller buyers to suffer from sticker shock because of the underwriting fees commonly required to complete due diligence. However, some newer programs for smaller deals don’t require the payment of underwriting fees for due diligence and terms and conditions are fairly broad. The market is becoming a bit more flexible and it is often possible to obtain a viable quote with an application and conference call.

To obtain a solid indication the following information is commonly needed:

• Purchase or Sales Document
• Audited Financial Statement from the Target Company (If no audit, must have a Buyers Quality of Earnings Report)
• Confidential Information Memorandum (not always required)

Once this information is provided to the markets, a Non-Binding Indication Letter (NBIL) is often received within a week, providing a basic outline of the quote for review and the underwriting fee required to begin the process.

BOTTOM LINE

Representations and warranties is one of the most significant growth initiatives in the insurance industry today. There’s a lot of room to run, especially with smaller companies looking to exit or be acquired by a larger company. Offering RWI is another way for retail partners to differentiate themselves when talking with clients. It also means contact with M&A attorneys, which can help expand the business pipeline.

Many small to mid-size organizations are either uneducated about the coverage or assume it’s not available to them based on their size. However, innovative products are impacting the space by reducing costs and streamlining underwriting, which opens up new opportunities for retail agents to help clients through the M&A process. Navigating the nuances of the coverage can be complex, but CRC Group specializes in understanding the risks clients face. Contact your local CRC Group producer today.

CONTRIBUTORS

• Mike Edmonds is a Professional Lines Broker with CRC Group’s Seattle office where he specializes in Cyber & Technology, E&O, Healthcare, and Management Liability as part of the Seattle ExecPro Team.

END NOTES

1. A Guide to M&A Representations and Warranties Insurance in Mergers and Acquisitions, Forbes, January 23, 2019. https://www.forbes.com/sites/allbusiness/2019/01/23/guide-mergers-acquisitions-representations-warrantiesinsurance/?sh=3742d1b367f3
2. Looking Back at M&A in 2024: Dealmakers Adapt as the Market Idles, Bain & Company, 2025. https://www.bain.com/insights/looking-back-m-and-a-report-2025/
3. M&A activity insights: December 2024, EY, December 2024. https://www.ey.com/en_us/insights/mergers-acquisitions/m-and-a-activity-report