Representations and Warranties Insurance (RWI)
By Nick Bryant, Co-Founder and CTO, SMB Investor Network
1 min read
Definition
Insurance that covers losses from breaches of seller representations in M&A transactions, increasingly common in deals over $20M.
Representations and Warranties Insurance (RWI) provides coverage for losses arising from breaches of the seller's representations and warranties in a purchase agreement.
How RWI Works
Seller makes representations (statements of fact)
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Buyer discovers breach post-closing
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RWI policy covers buyer's losses
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Seller has limited or no indemnification exposure
RWI Coverage Details
Premium: 2-4% of coverage limit Coverage: Typically 10-20% of deal value Retention: 0.5-1% of deal value (buyer's deductible) Policy Term: 3-6 years depending on rep type
Benefits of RWI
For Buyers:
- More protection than seller indemnification
- Insurer has resources to pay claims
- Preserves seller relationship
- Simplifies negotiations
For Sellers:
- Cleaner exit (limited ongoing liability)
- Higher proceeds (smaller escrow)
- Competitive advantage (easier for buyer)
When RWI Makes Sense
- Deal size >$20M (cost-effective)
- Seller with limited indemnification capacity
- Competitive auction situations
- Private equity exits (clean break)
For smaller SMB deals, RWI is typically too expensive relative to deal size.