The buyer wants a 10 percent cash indemnity escrow held for eighteen months to cover breaches of representations and warranties. How do we push them toward a Buy-Side Representation and Warranty Insurance policy instead, and how should we split the premium and retention costs?

Question

Tyler Smith · Accepted Answer

A traditional ten percent indemnity escrow locks up a significant portion of your hard-earned purchase price in an escrow account, leaving you exposed to post-closing disputes and escrow withholding battles. Shifting the transaction to Buy-Side Representation and Warranty Insurance, or RWI, transfers the primary risk of catastrophic breaches from your balance sheet to a commercial underwriter, allowing you to walk away from the closing table with virtually all your cash.

To make this transition, position RWI as a clean execution tool that benefits both parties. With a buy-side policy, the buyer gains access to higher aggregate liability limits, often up to ten percent of enterprise value, with a three-to-six-year policy survival period. In contrast, you can negotiate your seller liability down to a minimal retention escrow, typically 0.5 to 1.0 percent of enterprise value, which drops to zero after twelve months.

When proposing RWI, handle cost allocations cleanly in your negotiations. In mid-market transactions, market practice typically splits total policy costs equally between buyer and seller. These costs include the underwriter diligence fee, policy premium, surplus lines taxes, and broker fees. Ensure that your agreement defines the policy as the buyer's sole and exclusive remedy for non-fundamental representation breaches.

Keep your fundamental representations, which cover organization, capitalization, ownership of shares, and broker fees, separate. Buyers will expect higher exposure for these, but you should cap overall fundamental liability at your net proceeds. Make sure the definitive agreement stipulates that the buyer cannot pursue claims against you for policy shortfalls unless the breach involves intentional fraud committed by the sellers.