This post uses hypothetical scenarios for illustrative purposes only. It does not describe any actual client, transaction, or representation, and is not legal advice.
A buyer’s lawyer sent me a draft purchase agreement last month with a clean “no indemnity” cover note. The deal was a stock acquisition of a mid-market software business, and the agreement was structured the way most middle-market deals now look — a representations-and-warranties insurance (“RWI”) policy carrying the indemnity load, a small retention from the seller as a deductible, and no seller-side escrow beyond the working-capital adjustment. The buyer’s counsel had attached the binder draft. I read the binder before I read the agreement, because the agreement’s allocation of risk is only as honest as the policy underneath it.
The binder had nine exclusions. Five years ago the same broker’s standard binder had three. The growth is real, it is industry-wide, and it is the part of the deal that founders do not see until the policy is bound — at which point the exclusions have been negotiated by the buyer with the broker, and the seller is told, late and informally, that some categories of risk are “outside the policy.” Those categories are not small. They are the categories where the largest middle-market claims have been paid out over the last five years, which is precisely why the carriers have moved them off-cover.
If you are a seller in 2026, the RWI policy is not the indemnity backstop your buyer is telling you it is. It is a partial backstop. The negotiation that matters most is no longer the indemnity clause in the purchase agreement; it is the exclusion list in the binder.
How the exclusion list grew
RWI started as a sleepy product. In the early 2010s it was used in a small fraction of middle-market deals, mostly as a way for private equity sponsors to get clean exits. Premiums ran around four percent of the policy limit, retentions were one percent of enterprise value, and the standard exclusion list had three or four items — known issues identified in diligence, pension underfunding, and certain transfer taxes. A buyer could buy a $20 million policy on a $200 million deal, the seller would stand behind a small retention for a year, and the agreement would otherwise treat the policy as the comprehensive indemnity.
The product scaled fast. By 2019 a strong majority of middle-market private-target deals carried RWI, premiums had compressed below three percent of the limit, and carriers had started paying real claims. The pattern of those claims drove what came next. Wage-and-hour misclassification claims, particularly in California and New York, were paying out at significant frequency. Cyber incidents whose roots traced back to pre-closing periods but were only discovered after closing were also paying out. So were a small but expensive set of environmental claims for PFAS contamination — the so-called “forever chemicals” that had quietly contaminated industrial sites and were just then surfacing as regulatory targets. The carriers responded the way carriers always do. They moved the categories where they were paying claims into the exclusion list.
By 2024 the pattern had repeated itself with healthcare reimbursement liabilities — overbilling exposure under federal and state programs, particularly in physician-practice rollups. By 2025 a new category had joined the list, prompted by the OpenAI litigation wave and the broader unsettled state of generative-AI copyright doctrine: claims arising out of training-data sources for proprietary AI tools developed by the target. Carriers do not know how to price the risk that the target’s machine-learning model was trained on copyrighted material, so they have simply written it out.
The standard binder in 2026 thus carries, in some form, exclusions for the following: wage-and-hour and worker-classification exposure; pre-closing cyber or data-security incidents that were not disclosed in diligence (a category written tightly enough that even unknown incidents are typically excluded); per- and polyfluoroalkyl substances (PFAS) and certain other emerging environmental contaminants; healthcare-program billing and reimbursement claims; intellectual-property infringement claims arising out of AI model training, AI-generated outputs, or open-source-license violations of a particular kind. Specific carriers add their own. Several major carriers also now exclude claims arising under foreign anti-corruption statutes for targets with material non-U.S. operations.
Why the buyer’s lawyer is unlikely to flag this
The exclusion list is not hidden, but it is buried. It sits in Endorsement 3 or 4 of a thirty-page policy, several drafts deep, and it is finalized in the week between the underwriting call and the bind. The negotiation runs between the buyer and the broker, with carrier underwriters in the background. The seller’s lawyer is typically not in the room for that negotiation. They are given the bound policy after the fact, after the diligence has been done and the purchase agreement has been signed.
The buyer’s lawyer has no incentive to flag the gap. If the policy excludes wage-and-hour and the target has a wage-and-hour problem, the buyer is the one bearing the unindemnified risk — and the buyer’s lawyer either negotiates a specific side indemnity from the seller for that gap, or the buyer takes the risk as part of the price. Either way, the seller is asked to absorb risk that the seller believed had been transferred to the policy. The seller-friendly-versus-buyer-friendly framing matters more here than in almost any other part of the deal, because the framing is what determines whether the seller’s lawyer thinks to ask for the binder before the agreement is signed.
What sellers should do at the LOI
The right move is to address the exclusion list before the agreement is signed, not after. That means three things at three different points in the process.
First, at the letter-of-intent stage, when the indemnity architecture is being sketched, the seller should insist that the LOI commit the buyer to obtain a specified policy limit and to share the binder with the seller before signing. The clause is short — something to the effect that the buyer will procure an RWI policy with a limit equal to at least ten percent of enterprise value, with a retention not exceeding one half of one percent of enterprise value, and will share the binder and any exclusion endorsements with the seller’s counsel no later than the third business day before signing. Buyers will negotiate this clause, but the structural concession is fair, because the buyer is already going to procure the policy.
Second, during diligence, the seller should know which of the now-standard exclusion categories are live risks for the target. A founder selling a services business with hourly workers should know whether the company has a wage-and-hour exposure, and if so should expect the carrier to exclude that category — and should plan for a side indemnity or a specific reduction in the purchase price to address the gap. A founder selling a software business with a proprietary AI feature should know the carrier will exclude AI-training-data claims, and should be ready to discuss the diligence path that addresses that risk.
Third, at signing, the seller should refuse to release the buyer from indemnity for excluded categories on the same terms the policy provides for covered categories. The standard middle-market deal in 2026 treats the RWI policy as comprehensive, which means the seller’s indemnity is capped at the retention and the survival is twelve to eighteen months. That is fine for covered categories. For excluded categories, the seller should be willing to provide a longer survival and a larger cap — but should also be paid for it. The buyer is not getting a free indemnity. The price for the side indemnity comes out of the working-capital adjustment, the escrow holdback, or, most often, the headline purchase price.
The buyer-side mistake the carriers are watching
The growing exclusion list creates an asymmetry that buyers occasionally exploit and that carriers have started to push back on. A buyer who knows in diligence that the target has a meaningful wage-and-hour exposure has an incentive to procure RWI without flagging the exposure in the underwriting call, because the policy will exclude the category anyway and the diligence path is shorter without the flag. The carriers have responded by treating the buyer’s knowledge at underwriting as a fact relevant to coverage on other categories. If the buyer was sophisticated enough to anticipate a wage-and-hour exclusion and did not flag the exposure, the carrier is going to scrutinize the buyer’s diligence on adjacent categories more carefully when an unrelated claim is made. The 2024 line of broker commentary on this point has been clear, and several middle-market claims have been denied or scoped down for related reasons. Marsh’s overview of the transactional-risk-insurance product walks through some of the underwriting mechanics, though the most candid discussion of the exclusion-list trajectory happens in private broker calls, not in the public materials.
For the seller, the practical takeaway is that the RWI policy is a partial backstop with a known list of holes, and the buyer’s incentive structure is not to fill those holes for the seller. The seller’s lawyer has to do that work, which begins with reading the exclusion list before the buyer’s broker has finalized it. The most productive negotiations on the binder happen in the underwriting call, before the carrier has fixed the language. After the binder is bound, the structural choices are made.
The deal architecture this implies
I have started writing LOIs differently because of this. Where the indemnity provision used to read “buyer will procure RWI, seller will stand behind a one-percent retention for twelve months,” I now write three sentences. The first commits the buyer to a specified policy limit and retention. The second requires the buyer to share the binder before signing. The third addresses excluded categories — a tiered indemnity, sized to the carrier’s actual exclusion list, with a longer survival and a larger cap for the excluded items. The result is an indemnity architecture that matches the way the policy actually works, rather than the marketing-deck version where the policy is treated as comprehensive.
Buyers’ counsel sometimes resist the third sentence. The resistance is informative. A buyer who is comfortable with the standard middle-market indemnity structure is comfortable in part because they know the exclusion list is doing work in their favor. The M&A practice I run sees this play out repeatedly in middle-market deals — the seller who reads the binder before the bind is the seller who gets a fair allocation of the excluded-category risk. The seller who reads it after is the seller who finds out, eighteen months post-closing, that the wage-and-hour claim they thought was covered was carved out at the underwriting call they were never invited to.
The RWI product has not failed. It does what it has always done — transfers a defined slice of indemnity risk from the seller to a third-party insurer in exchange for a premium that is, in most middle-market deals, well under one percent of enterprise value. But the slice has gotten thinner, and the un-transferred slice has gotten thicker, and the seller’s lawyer is the one who has to know the difference.
If you are a founder or controlling stockholder preparing to sell a business under a deal that will use rep-and-warranty insurance, 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.
— John
