R&W Insurance (Representations and Warranties Insurance)

R&W insurance has transformed M&A indemnification in the last decade. Before R&W, every deal had material seller indemnification exposure (typically 10% cap, 18-month survival) secured by escrow. R&W shifts that risk to an insurance policy: the insurer takes on the risk, the buyer claims against the insurer rather than the seller, and escrow drops dramatically (often to 0.5-1% or zero).

How it actually works: Policy mechanics: (1) buyer-side policies dominate — the buyer purchases, insurer covers buyer's indemnification losses; (2) retention (deductible) — 0.5-1% of deal value, buyer absorbs before insurance kicks in; (3) limits — typically 10% of deal value, higher available; (4) premium — 2-4% of coverage limit (so 0.2-0.4% of deal value for 10% coverage); (5) policy period — 3 years for general reps, 6 years for fundamental/tax reps; (6) exclusions — known issues identified in diligence, certain areas (pension underfunding, pre-policy cyber).

For sellers, R&W enables clean-exit structures: minimal or no escrow, limited or no indemnification obligations, full proceeds at close. For buyers, R&W provides protection without chasing sellers post-close, plus a more collectible counterparty (insurer).

R&W is standard for deals above $20M — estimated 80%+ of deals above $50M use it. For smaller deals, fixed costs (premium minimums ~$200K) affect economics, but policies are increasingly available down to $10M.