We are being asked to purchase Reps and Warranties insurance for our transaction, but we do not understand who actually benefits from this expense. How does incorporating RWI into our deal structure affect our indemnity exposure and our cash proceeds at close?

Question

Tyler Smith · Accepted Answer

Reps and Warranties Insurance, or RWI, is a transaction insurance policy that protects both the buyer and the seller from financial losses resulting from breaches of the representations made in the purchase agreement. Historically used only in large corporate transactions, RWI is now common in middle-market deals because it fundamentally changes how risk is allocated at close.

Without RWI, a buyer typically demands that ten to fifteen percent of the purchase price be held in an escrow account for twelve to twenty-four months to cover potential indemnity claims. By introducing RWI into the deal structure, you can reduce this escrow requirement to a fraction of that amount, often less than one percent, allowing you to walk away with significantly more cash at close.

The buyer benefit is clear: they can claim directly against an insurance policy instead of chasing the former owners. The seller benefit is the elimination of long-term contingent liabilities.

When structuring a deal with RWI, negotiate who pays the premium. It is common to split the cost, but even if you cover the entire premium, the cash freed from escrow at close usually far outweighs the insurance cost. Work with your leadership team during your Level 10 Meetings™ to ensure your due diligence disclosures are exhaustive, as the insurance company will audit your records before issuing the policy.