This post uses hypothetical scenarios for illustrative purposes only. It does not describe any actual client, transaction, or representation, and is not legal advice.
Here is a 2026 mid-market M&A pattern worth paying attention to. A founder is mid-sale, in the last stretch before signing, and on a Sunday night his lawyer raises an alarm about a single sentence. The buyer’s draft has dropped the materiality scrape from the RWI definitions. The lawyer has spent two days fighting over it. The founder wants to know whether this is the kind of thing to care about, or the kind of thing to let his lawyer ride out.
The materiality scrape — for non-deal-lawyers, a small but high-leverage clause that tells the buyer’s reps to read “material” out of certain reps when calculating losses under the RWI policy — has been a seller-favorable boilerplate item for a decade. In 2026, the underwriters are pushing back. RWI carriers are quietly carving the scrape down or out, and buyer-side firms are drafting policies the scrape no longer reaches. That makes the scrape a different kind of negotiating chip in 2026 than it was in 2023. The seller-side instinct is to fight for it. In most deals this year, that fight is the wrong one to pick.
What the materiality scrape actually does to your reps
Start with the reps. When you sell your company, you make dozens of representations in the purchase agreement — that your financial statements are accurate, that you are not in breach of your material contracts, that there is no undisclosed litigation, and so on. Many of those reps are softened with the word “material” or a phrase like “in all material respects.” That qualifier is your friend as a seller. It means a small, immaterial inaccuracy is not a breach at all.
The materiality scrape takes that qualifier away — and it usually takes it away twice. A typical scrape says that for purposes of determining both whether a rep was breached and how much the resulting loss was, you read all those materiality qualifiers out of the reps as if they were never there. Lawyers call the two jobs the “double scrape”: one scrape for breach, one scrape for damages. The buyer’s argument is that materiality qualifiers should govern what the seller has to disclose, not whether the buyer gets paid when something turns out to be wrong. The seller’s argument is that you negotiated those qualifiers for a reason and the buyer is trying to delete them through a back door.
So far, this is a real fight, and on a traditional deal — seller indemnity, real escrow, money coming out of your pocket — it is a fight worth having. The scrape can be the difference between a basket of small breaches that never crosses your deductible and a pile of the same breaches, now “unmaterialized,” that does. On a traditional deal, I will spend leverage to narrow a scrape to damages-only, or to carve the most sensitive reps out of it entirely.
Why insurance changes the math
Here is the part the Sunday-night founder had not been told. On a rep-and-warranty insurance deal, the indemnity does not primarily run to you. It runs to the policy. The buyer’s first dollar of recovery for a rep breach comes out of the retention — the deductible the buyer agreed to absorb — and then out of the insurer’s coverage. The seller’s residual exposure is small by design: a token escrow, a tight survival period, and a narrow fraud carve-out. That is the entire point of structuring the deal around representations and warranties insurance in the first place.
Which means the materiality scrape, in an insurance deal, is mostly a fight between the buyer and the carrier about what the policy covers — not a fight about what comes out of your bank account. The scrape still matters to the buyer, because a broader scrape means more covered losses. It still matters to the insurer, because the insurer priced the policy assuming a particular scrape. But it reaches the selling founder only in the thin sliver where the buyer’s loss exceeds the policy and lands back on the seller’s residual indemnity — the small escrow, or the survival tail. For most founders in most insured deals, that sliver is narrow enough that burning real negotiating capital to shave the scrape is a poor trade.
And the market has noticed. The 2026 private-target deal data shows insured deals carrying materiality scrapes less often than uninsured ones, alongside fewer pro-sandbagging provisions, shorter survival periods, and more “no other representations” language. SRS Acquiom’s deal-terms work documents the broader pattern: insurance has been quietly rewriting the indemnification section of the private-company purchase agreement, and the scrape is one of the clauses it is rewriting. When the policy is the real backstop, the parties stop fighting as hard over a clause that mostly allocates risk between the buyer and its carrier — though founders should remember that the policy itself covers less than it used to, which is exactly why the residual seller exposure still deserves attention.
Where to spend the leverage instead
If you are going to let the scrape go on an insured deal, the discipline is to redeploy that leverage — not to pocket it as goodwill. There are at least three fights that, for a selling founder, reach your wallet far more directly than the scrape does.
First is the purchase-price adjustment. The working-capital true-up, the cash-and-debt reconciliation, the closing-statement mechanics — none of that is covered by the insurance policy. A true-up that comes in light is a direct, uninsured reach into your proceeds, and the definitions that drive it are negotiated in the same week you are arguing about the scrape. That is where I want a founder’s attention. The way the working-capital target number is set, not just the true-up mechanic controls a much larger slice of your money than the scrape ever will on an insured deal.
Second is the fraud carve-out and the definition of fraud. The one place the insurer can come back through you is subrogation for actual fraud. A fraud definition that says “actual fraud by such seller” is a personal, knowing-misrepresentation standard. A definition that reaches every officer, employee, and agent of the company, or that imports the broader equitable-fraud concept, is an open-ended exposure that no policy caps. That clause is worth real leverage.
Third is the special-indemnity schedule — the list of specific matters the buyer pulls out of the insurance and puts directly on the seller, usually because the carrier excluded them. Pre-closing taxes, a known environmental question, a piece of pending litigation. Each of those is an uninsured, seller-funded obligation, and each one is negotiable on its own terms. Every item the buyer moves from the policy onto your schedule is a dollar of your exposure that the scrape debate was distracting you from.
The honest version of the advice
I am not telling founders that the materiality scrape never matters. On an uninsured deal with a real seller indemnity, it can matter a great deal, and I will fight it. I am telling you that the reflex to treat the scrape as a marquee issue is a holdover from the pre-insurance era, and that on the insured deals that now dominate the middle market, it is usually the wrong place to plant your flag.
Negotiating leverage in a sale is a finite resource. You get a certain number of issues where you can credibly say “this one I need.” Spend them on the clauses that move money out of your column and into someone else’s. On an insured deal, the scrape is rarely one of them — and a founder who understands why can hand it over with a clear conscience and put the saved capital toward the parts of the deal that actually decide what they take home.
If you are a founder staring at a materiality-scrape fight in an insured deal and want a second read on whether it’s worth your leverage, feel free to reach out to my firm manager, Magda, at Magda@montague.law, or fill out our contact form. Mention you read this post.
