Representations and warranties insurance

RWI shifts the indemnity risk from the seller to an insurer. The buyer — usually the insured party in a buy-side policy — claims against the policy rather than against the seller, which allows the escrow to be reduced substantially and lets a seller walk away with more of the proceeds and less residual exposure.

The economics involve a premium expressed as a percentage of the coverage limit, an underwriting fee, and a retention that functions as a deductible and is often shared between the parties for an initial period. Underwriters run their own review of the diligence, so the process adds time and requires that diligence has actually been thorough — a thin diligence file makes a policy harder or more expensive to place.

It is not universal. Policies exclude known issues, and coverage typically excludes matters the parties were already aware of, so an identified problem still needs a special indemnity or a price adjustment. Availability at the smallest deal sizes has improved but remains limited, and whether it is worth pursuing depends on the size and shape of your transaction.