The broker’s underwriting call is, depending on your taste, either the most efficient or the most surreal hour in modern M&A practice. Six lawyers and two underwriters dialed in from three time zones, the diligence binder shared on screen, the carrier’s senior counsel asking the seller’s tax partner to walk through the company’s six-year audit history while a policy that nobody has read all the way through gets re-priced in real time. Somewhere in the middle of that hour, decisions are being made that will move millions of dollars between the parties at closing. Most of them are not being made by the lawyers in the room. They are being made by the language in the policy that will be sent out for review the next morning.
I have run that hour from both sides — buyer-side, where the policy is my client’s primary protection against a breach the seller will not be around to indemnify, and seller-side, where the policy is my client’s only defense against a coverage gap turning into a personal-balance-sheet problem. The interesting work, in either role, is not in the form policy. The form is reasonably well-settled. The interesting work is in five negotiation points that the form does not resolve and that buyers and sellers routinely under-invest in. This post walks through them in the order they tend to come up.
Retention and how it actually splits
The retention is the policy’s deductible. Modern markets set it at half a percent of enterprise value at policy inception, dropping to a quarter percent at the policy’s first anniversary. For a seller, the retention is the headline number to know — but the more important number is how the retention is split with the buyer in the purchase agreement.
The default in most deal documents is a fifty-fifty split up to a tipping point — typically the full retention at the larger pre-anniversary level. The tipping point is the cap on the seller’s retention exposure, beyond which the policy carries the load alone. Sellers should pay close attention to two things. First, whether the split survives the anniversary drop. A drafting failure here can leave the seller obligated to share a one-half-percent retention even after the policy retention has stepped down to a quarter point. Second, whether the seller’s share is satisfied first or last. If the seller’s share is satisfied first, the seller writes checks before the policy responds. If the seller’s share is satisfied last, the policy pays into the loss and the seller’s exposure activates only at the back end. The front-end-versus-back-end question is rarely highlighted in the markup, and it is worth a phone call to the broker to confirm.
Knowledge scrapes
The knowledge scrape is the seller-side negotiating point with the highest dollar leverage in the policy. The carrier’s standard exclusion provides that losses arising from facts known to the buyer’s deal team before closing are not covered. A knowledge scrape modifies that exclusion to remove qualifiers like “to the seller’s knowledge” or “to the company’s knowledge” from the representations themselves for purposes of policy coverage — meaning the carrier will pay even on knowledge-qualified reps that turn out to be inaccurate, so long as the buyer’s deal team did not have actual knowledge.
The scrape is functionally a transfer of risk from the seller to the carrier. The seller signs a knowledge-qualified rep and pays no premium for the scrape; the buyer pays the marginally higher premium and gets a richer policy. Buyers who do not push for a full scrape are leaving coverage on the table. Sellers should expect every knowledge-qualified rep to be scraped for policy purposes, because the seller bears no incremental cost for it and the buyer is willing to fund it.
The trap in this provision is the definition of “buyer’s knowledge.” Carriers will negotiate that definition aggressively. A definition that captures only the deal team’s chief executives is generous to the buyer; one that captures every diligence team member, every outside advisor, and every email in the data room is generous to the carrier. The right answer for a buyer is a defined group of named individuals — typically the deal sponsor, the deal-team lead, and one or two functional leads — with actual rather than constructive knowledge. Anything broader becomes a back-door exclusion the carrier will rely on in a claim.
Tax exclusions and the standalone tax policy
Standard RWI policies exclude specific tax matters identified during diligence — known disputes, transfer-pricing positions, certain state and local liabilities. The exclusions are usually pulled from a tax-due-diligence memo that the buyer’s tax counsel produces in the last two weeks of the deal. Sellers should expect the exclusions to be specific and narrow. Buyers should expect that any exclusion the carrier proposes is the carrier’s opening position, not a final one.
The negotiation here matters because excluded tax matters are typically the highest-severity exposures in a deal. A transfer-pricing position that the seller has taken consistently for five years can be a one-percent-of-enterprise-value problem in expectation and a five-percent problem in tail. Excluding it from the RWI policy and leaving it to the seller’s residual indemnification effectively concentrates the deal’s biggest risk on the seller’s balance sheet.
The market response is the standalone tax-liability policy — a separate insurance product priced on the specific tax position rather than as a portfolio. For deals where the tax exposure is identifiable and quantifiable, a standalone tax policy moves the risk off both the seller’s balance sheet and the buyer’s risk register. The premium is not cheap, but on a transaction where the tax position is the swing factor, the policy is less expensive than the alternative of negotiating an additional escrow.
Interim breach and the bring-down condition
The interim-breach exclusion is the policy provision sellers most often misunderstand. Standard policies exclude losses arising from facts that became false between signing and closing. The buyer’s protection in that scenario is the bring-down condition in the purchase agreement — the right to walk if the reps cease to be true at closing — not the policy.
The negotiation point that matters here is the scope of the bring-down. A “no material adverse effect” bring-down lets the buyer walk only on a serious deterioration. A “true in all material respects” bring-down lets the buyer walk on more granular changes. A “true in all respects” bring-down with no materiality qualifier lets the buyer walk on almost anything. Buyers should push for a granular bring-down because the carrier will not pay for interim breach. Sellers should push for a high-bar bring-down because every clause that lets the buyer walk is also a clause the buyer can use to renegotiate price under deal stress.
The right negotiated outcome on most middle-market deals is a tightly drafted MAE clause coupled with a “true in all material respects” bring-down on operational reps and a “true in all respects” bring-down on a defined set of fundamental reps. That structure aligns the policy’s coverage scope with the buyer’s contractual remedies and avoids the ugly scenario in which the buyer is uninsured for a closing-period change and the seller is exposed to a walk-away or repricing.
Subrogation and the seller’s residual exposure
The fifth negotiation point is the carrier’s subrogation right against the seller. After the carrier pays the buyer on a claim, the carrier has the right to pursue the seller for the loss — except that, in modern markets, this right is contractually waived for everything other than fraud. The waiver is standard. The fight is on what counts as fraud.
Carriers prefer a broad fraud definition that captures gross negligence, willful misconduct, and recklessness. Sellers prefer a narrow definition that requires actual knowledge of falsity and intent to deceive. The difference matters because the subrogation right is the only meaningful path back to the seller’s pocket after the policy pays, and a broad definition makes that path passable. Sellers should expect the negotiation to land on a narrow definition. Buyers should not expect the policy to be a substitute for a fraud carve-out in the indemnification provision; it is not.
For the broader doctrinal context on M&A protections, our M&A practice page is the map. The deeper market data on RWI pricing, retentions, and claim trends is published periodically by the major brokers — Lockton, Marsh, and AIG all release annual reviews of the RWI market that practitioners watch closely. The most accessible public-facing version is the Lockton RWI insights series.
The point of the exercise
RWI is now standard. The form policy is reasonably well-settled. What separates a clean deal from a messy one is the negotiation around the five points above — retention split, knowledge scrape, tax exclusions, interim breach and bring-down, and subrogation. Those five points are where the actual money lives. Every dollar spent negotiating them carefully at signing is a dollar that does not turn into a multiyear coverage dispute after the deal has closed and the parties have moved on.
If you are working a deal where the policy is being underwritten right now and you want a second set of eyes on any of these points, 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
