The claim came in two years after closing. A former customer of the target sued the buyer’s subsidiary in California state court, alleging a software-licensing breach that pre-dated signing — the kind of pre-closing third-party matter an RWI policy is built for. The buyer’s deal counsel did what deal counsel reflexively does. He called the litigators in his own firm, walked them through the diligence record, and started drafting an answer. Two days later he got an email from the carrier’s claims department politely requesting that no further pleadings be filed without the carrier’s prior written consent. That email was the RWI conduct of claims clause — in its 2026 form — talking.
That email was not a misunderstanding. It was the carrier doing what the policy now lets it do. The conduct-of-claims clause in the 2026 vintage of buy-side representations-and-warranties insurance policies — the AIG, Euclid, Liberty, Beazley, Mosaic forms I see across mid-market deals — has migrated over the last three years away from the passive-payor model and toward a model where the carrier asserts defense control once the loss is reasonably likely to exceed the retention. That migration has happened quietly, embedded in form changes broker marketing describes as “process improvements,” and most buyer-side deal lawyers have not adjusted their negotiation posture to match.
For buyer’s counsel who has just signed up to defend the target’s pre-closing operating history with someone else holding the steering wheel, the consequences are immediate. For seller’s counsel watching from outside the policy, the consequences are less direct but still material — because the carrier’s defense decisions drive what gets paid, what gets subrogated, and what shows up in a demand letter eighteen months later.
What the RWI conduct-of-claims clause actually says now
The older form of the conduct-of-claims provision read like a notice-and-cooperation clause. The insured had to notify the carrier of any third-party claim that might give rise to coverage, cooperate with the carrier’s investigation, and keep the carrier informed. The insured ran the defense; the carrier wrote checks at the end. That bargain reflected an underwriting view in which the carrier preferred to stay out of the operational reality of the claim and let insured-selected counsel drive the litigation.
The current form reads differently in three places. First, the notice obligation has been compressed — most policies now require notice within ten to fifteen business days of the insured’s first awareness, and carriers are policing the deadline with sharp denial letters for late notice. Second, the cooperation clause has been expanded into an affirmative consultation-and-consent obligation: the insured must consult before retaining counsel, must obtain consent before settling or stipulating to any material fact, and must obtain consent before any litigation decision that could materially affect the size of the loss. Third — and this is where the real shift sits — most forms now include an “associate counsel” or “defense oversight” right that lets the carrier appoint its own counsel to monitor or co-defend, with a backstop provision letting the carrier assume defense control entirely if it concludes the insured is materially mishandling the defense.
Read together, those changes turn the conduct-of-claims clause into something that looks much closer to a directors-and-officers policy than to a traditional indemnity policy. The carrier has not formally taken on a duty to defend in most forms — that distinction matters for tax and reserving purposes on the carrier side — but functionally, the carrier is now positioned to direct the defense whenever it chooses to assert the consent right with conviction. The ABA Business Law Today 2024 forecast on RWI tracks the same directional shift.
Why RWI carriers wanted defense control in 2026
Two underwriting realities drove the change. The first is loss frequency. RWI claim frequency on policies bound in the 2019–2022 vintage came in materially higher than the carriers priced for — high-teens to low-twenties percent of policies against pricing assumptions in the mid-teens. The carriers responded with tighter underwriting on the front end and defense-control rights on the back end, because defense costs and settlement strategy turned out to be where claim severity actually lived. A buyer’s litigation budget that runs to seven figures is not a small number when the policy limit is twenty-five million and the carrier is on the hook for the retention-plus delta.
The second is alignment. The buyer who just acquired the target has business reasons to want the dispute resolved fast and quietly — reputational, customer-relationship, integration-distraction. The carrier does not. The carrier wants the dispute resolved at the loss number the carrier thinks is right. Those preferences diverge often enough that the carriers concluded, by about 2023, that they could no longer underwrite the product responsibly without a contractual seat at the defense table. The conduct-of-claims clause is how they bought it — and the same underwriting cycle that produced it is also narrowing the 2026 RWI exclusion list around the policy’s perimeter.
The buyer’s counsel becomes a witness
The operational consequence on the buyer side is that the deal lawyer who handled signing and closing — who knows the diligence record, the disclosure schedule, the negotiating history of the rep at issue — is now a fact witness in the matter the carrier is directing. The deal lawyer used to run the post-closing claim defense alongside her client. Now her notes, drafts, term-sheet redlines, and email chains are evidence the carrier’s appointed counsel will want to see, and she is no longer the principal advocate.
That shift creates two practical problems. The first is privilege. The deal lawyer’s communications with the buyer about diligence findings, the negotiated allocation of risk on a particular rep, the buyer’s pricing decisions — protected by attorney-client privilege when the deal lawyer was advising on transaction strategy. They remain privileged in the buyer-counsel relationship, but the carrier’s appointed defense counsel will press for production under cooperation-clause arguments, and the buyer’s interest in protecting privilege may not align with the carrier’s interest in efficient claim defense. The privilege analysis that used to be straightforward becomes a three-way negotiation.
The second problem is positioning. A deal lawyer whose own work product becomes part of the factual record is in an uncomfortable spot. The carrier’s appointed counsel may have views about what the diligence should have caught, what the schedule should have disclosed, what the rep should have been drafted to exclude. Those views may not be flattering, and they may produce subrogation theories the carrier presses against the seller that touch the deal lawyer’s own work product. Buyer-side firms have started separating the deal team from post-closing claim communications and retaining separate monitoring counsel — but the structural problem is not solved by hygiene alone.
Negotiating the RWI conduct-of-claims clause at policy bind
The negotiation window for the conduct-of-claims clause is during underwriting, not after the claim hits. By the time the carrier is asserting consent rights on a live matter, the contract is the contract. Three points are worth pushing on, in rough order of leverage.
First, the consent standard. The default in most current forms is “not unreasonably withheld,” which sounds protective and litigates poorly. Buyers should push for language requiring the carrier to consent within a defined number of business days of a written request, with deemed-consent fallback. Carriers will resist a hard deemed-consent on settlement authority but will often agree to deemed-consent on routine litigation steps — motion practice, discovery scheduling, choice of local counsel. That is the practical operating right the buyer needs to keep the case moving.
Second, the assumption-of-defense trigger. The carrier’s right to assume defense control should be triggered only on objective conditions — material breach of the cooperation clause, conflicting positions taken by the insured, or insured’s election to tender — and never on the carrier’s own determination of mishandling. Carrier forms drift toward subjective triggers. Push them out, every time. The risk is that the carrier elects to take over a case the buyer is winning, replaces buyer-friendly counsel with a panel firm whose loyalty runs to the carrier, and settles at a number that exhausts the policy and pulls the matter under the seller’s fraud carve-out for the difference. The architecture of indemnification caps in the underlying merger agreement matters here because it determines who pays the delta.
Third, the counsel-selection right. Buyers should reserve the right to retain counsel of their choosing subject to carrier consent, with a pre-approved panel agreed at bind that includes the buyer’s preferred firms. The panel approach is standard in cyber and D&O coverage and is increasingly available in RWI. It cuts off the carrier’s leverage to insist on panel-only counsel when a claim hits, and it lets deal counsel play a supporting role rather than being displaced.
What seller’s counsel should care about
A seller looking at this from outside the policy has a narrower set of moves but a real one. The carrier’s defense decisions drive the size of the eventual claim, and that claim drives subrogation pressure against the seller for any portion above the policy or any matter the carrier characterizes as fraud-carveout exposure. A seller whose counsel reviews the buyer’s policy before signing — which the seller should insist on in any RWI deal — can negotiate two things into the merger agreement that limit downstream exposure.
The first is a contractual right to notice of any third-party claim the buyer reports to the carrier, with a corresponding right to be consulted before the buyer agrees to a settlement that could trigger subrogation. The buyer will resist on the theory that it muddies the carrier relationship, but carriers themselves are increasingly comfortable with seller-notice obligations because they reduce post-resolution disputes. The second is a clarification of the actual-fraud standard in the agreement that aligns with — and is no broader than — the standard in the policy. A seller confident that “fraud” in the agreement means the same thing it means in the policy has eliminated the gap-risk that creates subrogation theories for amounts above the cap. The base merger-agreement architecture already accommodates these mechanics; they need to be activated, not invented from scratch.
The clause that decides who runs the lawsuit
The conduct-of-claims clause is now the most under-negotiated provision in the buyer’s RWI policy. It used to be a notice-and-cooperation backwater. It is now the contract term that decides who picks counsel, who controls strategy, who authorizes settlement, and who bears the privilege-and-positioning problem when the deal lawyer’s own work becomes part of the record. Buyer-side firms that treat the clause as boilerplate are giving up control of the post-closing claim they will eventually have to manage. Our representations and warranties insurance practice — sitting inside the broader M&A practice — increasingly turns on the realization that the policy is a contract that needs negotiating at bind, not after the demand letter arrives.
If you are buyer’s or seller’s counsel working through an RWI placement and want a second read on the conduct-of-claims clause your carrier is offering, reach out to my firm manager, Magda, at Magda@montague.law, or fill out our contact form. Mention you read this post.
