Reps & Warranties Insurance (RWI)

RWI has become the standard risk allocation mechanism in private equity-sponsored M&A transactions and is increasingly common in mid-market and lower-middle-market deals. The policy replaces or supplements the traditional indemnification holdback structure — transferring breach-of-rep risk from the seller to a rated insurance carrier.

Policy structure: RWI policies are primarily 'buy-side' (purchased by the buyer), though sell-side policies exist. The buyer-side policy pays the buyer directly for covered losses above a retention (deductible), typically 1% of deal value. Coverage limits usually range from 10-20% of enterprise value. Policy premiums run approximately 2-4% of the coverage limit, with underwriting requiring a full diligence data room review.

Key exclusions: RWI policies universally exclude known breaches (issues identified in due diligence and disclosed), purchase price adjustment mechanisms (NWC adjustments have their own path), forward-looking projections, environmental contamination known at signing, pension underfunding, and criminal conduct. These exclusions make the diligence data room quality critical — disclosed issues cannot be insured.

SBA and regulatory context: For SBA 7(a) acquisition loans, RWI does not directly affect SBA underwriting — the SBA focuses on business cash flow and equity injection. However, an RWI policy demonstrates a sophisticated transaction structure that lenders view positively. FASB ASC 805 requires the buyer to assess whether RWI proceeds constitute contingent assets that should be recognized at fair value at the acquisition date (https://www.fasb.org/standards/accounting-standards-updates). The Treasury's Federal Insurance Office monitors the broader insurance market including D&O and transaction liability policies (https://home.treasury.gov/policy-issues/financial-markets-financial-institutions-and-fiscal-service/federal-insurance-office).