Representations and Warranties Insurance (RWI) is a specialized M&A indemnification insurance policy that covers losses arising from breaches of the seller's representations and warranties in a purchase agreement — allowing the seller to receive full deal proceeds at closing while insuring the buyer against post-close discoveries. The SEC's Regulation S-K (17 C.F.R. § 229.503, https://www.ecfr.gov/current/title-17/chapter-II/part-229/subpart-229.500/section-229.503) addresses material risk factor disclosure including indemnification obligations in public company M&A.
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).
RWI premiums are typically 2-4% of the coverage limit purchased. On a $5M coverage limit, expect $100K-$200K in premium. Retentions (deductibles) are usually set at 1% of deal value. The market has become more competitive since 2018, and premiums have compressed from historical 3-5% to 2-3% in many deal structures. Underwriting time is typically 7-10 business days, which fits within most M&A diligence timelines.
In most PE-sponsored deals, yes — RWI fully replaces the indemnification holdback, and the seller receives 100% of proceeds at close. Some deals retain a small 'fundamental representations' escrow (0.5-1% of deal value) to cover claims that are explicitly excluded from RWI — fraud, criminal conduct, and certain tax representations. NWC adjustments are handled separately from RWI and still use their own escrow mechanism.
Yes, though the market has historically focused on deals above $20M-$50M enterprise value. A lower-middle-market RWI product now covers deals as small as $5M-$10M, with simplified underwriting and compressed timelines. For SBA 7(a) acquisition loans in the $2M-$5M range, RWI is uncommon but available from specialty insurers. The premium economics become less favorable at smaller deal sizes — a $50K premium on a $2M deal (2.5% of deal value) is a meaningful transaction cost.