The buyer is pushing for us to buy a Representation and Warranties Insurance policy instead of using a traditional indemnity escrow. Who should pay for this premium, and how does this impact our net proceeds and risk profile at close?

Question

Tyler Smith · Accepted Answer

Representation and Warranties Insurance, or RWI, is an excellent tool to de-risk a transaction, but the allocation of its cost is a major negotiation point. Traditional indemnity escrows tie up ten to fifteen percent of your purchase price for twelve to twenty-four months.

An RWI policy replaces this escrow with an insurance policy, allowing you to walk away from the closing table with almost all of your cash. Because both parties benefit from this arrangement, you should never bear the entire cost of the premium.

The standard market practice is to split the premium and underwriting fees fifty-fifty between buyer and seller. Additionally, you must negotiate who covers the policy deductible, often called the retention. Your share of the retention should be capped at a nominal amount, usually around one percent of the deal value, and should decrease over time.

If the buyer insists on you paying the entire premium, look at your V/TO® and calculate if the immediate liquidity of a cash-at-close deal outweighs the insurance cost. Usually, paying a portion of the premium is well worth the peace of mind of avoiding a long-term escrow dispute, provided the buyer agrees to limit your post-closing liability to cases of actual fraud.