The first time most founders see a representation and warranty insurance quote, the reaction is a kind of polite confusion. The broker’s binder runs forty pages. The premium number is a quarter of a million dollars. There are exclusions written in language that reads like it was translated twice. And the deal lawyer is saying, casually, that this is now standard — that the insurance is the point, that the indemnification section the founder spent two weeks negotiating is essentially a placeholder for the policy. The founder nods. The founder has no idea what just happened.
Here is what happened. Over the last fifteen years, the M&A market has quietly rebuilt itself around an insurance product that almost no one outside of deal practice has ever heard of. RWI — representation and warranty insurance — is now present in well over half of mid-market private deals and a near-supermajority of larger ones. It changes how purchase agreements get drafted, how indemnification gets negotiated, and, most important for a founder selling a company, how much money actually ends up in the founder’s pocket on the day after closing. This post is an attempt to explain it the way I wish someone had explained it to me when I was on the seller’s side for the first time.
What the policy actually does
An RWI policy is, at its core, a contract between an insurance carrier and the buyer of a business. The buyer pays a premium. In exchange, the carrier agrees to pay the buyer for losses arising from breaches of the seller’s representations and warranties — the long list of factual statements the seller makes in the purchase agreement about the company, ranging from “we own all the intellectual property we say we own” to “we are not a defendant in any lawsuit we have not disclosed.”
Before RWI existed, the buyer’s protection against those breaches was the indemnification provision. A portion of the purchase price would be held back in escrow — typically ten percent — for a year or two, available to the buyer if a representation turned out to be false. The seller hated escrow because it was the seller’s money sitting in someone else’s account. The buyer hated escrow because ten percent was rarely enough to cover a real problem. The lawyers liked escrow because it generated billable hours every time anyone made a claim against it.
RWI changes the math on all sides. Instead of holding back the seller’s money, the buyer buys an insurance policy. If the seller’s representations turn out to be inaccurate, the buyer files a claim with the carrier rather than chasing the seller. The seller walks away from closing with all of the cash, or nearly all of it. The carrier takes on the risk that the buyer used to absorb. Everyone, in theory, is better off.
The numbers, in rough strokes
A first-time founder seller benefits from understanding the basic economics. A typical RWI policy in 2026 covers limits of ten percent of the enterprise value. So on a fifty-million-dollar deal, the policy might cover five million dollars of breach claims. The premium for that coverage is somewhere between two and three percent of the limit — call it $100,000 to $150,000 on that example. The buyer typically pays the premium, though sometimes it is split, and the cost shows up somewhere in the deal economics whether anyone admits it or not.
The policy has a retention. That is the insurance term for a deductible — the amount of loss the buyer must absorb before the carrier starts paying. Modern retentions are usually around half a percent of enterprise value, dropping to a quarter percent after a year. So on the fifty-million-dollar deal, the buyer eats the first $250,000 of any breach claim, then drops to $125,000 after twelve months. Below the retention, the buyer is on its own. The seller is typically obligated to share the retention, half each, up to a tipping point.
The result, when you put it all together, is a deal where the seller’s at-risk exposure has shrunk dramatically. Instead of holding ten percent in escrow for two years, the seller might be on the hook for half a percent of the deal value, paid out over the first year, and only if there is actually a breach. The remaining ninety-nine and a half percent of the price is the founder’s, free and clear, the day after closing.
What the policy does not cover
The policy is not a wonderland. There are exclusions, and they are the part founders need to actually read. Every RWI policy excludes losses arising from facts the buyer knew about before closing — the so-called “actual knowledge” exclusion. Most policies exclude specific tax matters that surface in diligence. Most exclude purchase price adjustments, including the working capital fight I have written about elsewhere on the M&A page. Most exclude pension and employee-benefits underfunding. And most carry a fundamental-representation exclusion that is misnamed — the policy actually covers fundamental representations, but at higher limits and longer survival periods, while excluding certain specific recasts of them.
Two exclusions matter most for a founder. The first is the actual-knowledge exclusion. If the buyer’s deal team learned about a problem during diligence and chose to close anyway, the policy will not pay for that problem after closing. The implication is that diligence disclosures matter for the seller too. A robust disclosure schedule that surfaces issues during diligence not only protects the seller from breach claims; it also forecloses the buyer from a coverage claim against the carrier.
The second is the interim-breach exclusion. If a representation that was true at signing becomes untrue between signing and closing — say, a key customer cancels its contract during the gap — the policy generally will not cover the loss. The buyer’s protection in that scenario is the bring-down condition in the purchase agreement, not the insurance. Founders should not assume RWI substitutes for a careful walk-up to closing.
What the policy means for the negotiation
RWI restructures the seller-side negotiating posture. The single biggest change is that the indemnification cap is no longer the seller’s primary battlefield. In a no-RWI deal, the seller fights for a low cap, a long list of exceptions, and a short survival period because every breach claim hits the seller’s personal balance sheet. In an RWI deal, the policy is the cap. The seller’s residual exposure is typically limited to fraud, the seller’s share of the retention, and a narrow set of fundamental matters. The cap negotiation becomes a much smaller fight.
The other change is that the buyer becomes a more permissive negotiator on representations, because the carrier is the one underwriting the breach risk. Reps that buyers used to push back hard on — broad operational reps, sweeping IP reps, a “no undisclosed liabilities” rep without materiality qualifiers — get easier to accept once an insurance carrier is between the buyer and the loss. That permissiveness, however, is constrained: the carrier reviews the purchase agreement and will exclude reps it considers too aggressive. If a rep gets carved out of coverage, the buyer cares about it again, and the negotiation moves back to where it would have been pre-RWI.
For the structural fundamentals that sit underneath all of this, our simple merger agreement template walks through where each of these provisions lives in a typical document.
When RWI is worth it, and when it is not
RWI does not pencil on every deal. The policies have a floor — most carriers do not write policies under five or ten million dollars in limits, which roughly translates to deals under fifty million in enterprise value. Below that range, the friction cost of underwriting and the minimum premium make the product economically unattractive, and traditional escrow remains the right answer. For deals between fifty and two hundred fifty million, RWI is now the default, and the founder selling in that range should expect to see a policy in the deal structure.
Above that, the conversation gets more complicated. Larger deals can stack policies, blend RWI with self-insured retention, and use specialty coverages for tax and other discrete matters. Those structures are not first-time-seller territory. If a founder is selling a business in that range, the deal team will already include a broker who lives in that world.
For a deeper structural treatment of how RWI gets folded into a transaction, the Practical Law treatise on incorporating R&W insurance into M&A transactions is the standard reference. It is written for deal lawyers, but founders selling for the first time will find the section on policy economics readable.
The bottom line for a first-time seller
If you are selling your company and the buyer’s term sheet mentions RWI, the policy is going to change the shape of the deal in ways that are mostly favorable to you — less escrow, faster cash, lower long-tail exposure. The price is some complexity in the underwriting process and a set of exclusions that you should understand before you sign anything. The two things that matter most are diligence discipline and disclosure-schedule discipline. Tell the buyer’s team everything during diligence; write the disclosure schedule with the carrier’s exclusions in mind; do not assume RWI is a substitute for either.
If you are working on a sale right now and the broker has just sent over a policy quote that you do not entirely understand, 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
