Selling a Business

Representations and Warranties Insurance

Understand the instrument that turned a ten percent escrow into a one percent one — how the policy is underwritten, what it never covers, and when it genuinely delivers a clean exit rather than the appearance of one.

  • Advanced
  • 9 min total
  • 12 chapters

What decision this helps you make: Whether to use representations and warranties insurance, who pays for it, and how to structure the indemnity around it so the residual exposure sits where you think it does.

What this topic is

A transactional insurance product, almost always bought by the buyer, that covers losses from breaches of the seller's representations and warranties in a purchase agreement. It shifts recovery from the seller's escrow to an insurer, which allows the parties to reduce or eliminate the seller's post-closing indemnity for general representations.

Why it matters

For deals large enough to attract underwriters, this is the single largest change in private M&A risk allocation in twenty years. It converts a seller's post-closing exposure from ten or fifteen percent of the price held for two years into a small retention, or in some structures nothing at all. But the exclusions are where the product is defined, and a seller who assumes the policy covers what the representations say will find the gap at exactly the wrong moment.

Who should learn it

Owners and advisers structuring an indemnity package, and anyone whose buyer has proposed an insured deal.

What you will understand

  • How the policy is underwritten and what the process requires from a seller
  • The standard exclusions, and why known issues are the most important of them
  • How the economics work — limit, retention, rate on line, and who pays
  • When insurance genuinely produces a clean exit and when it produces the appearance of one

Prerequisites

Common misconception

"With insurance in place I have no post-closing exposure." Almost never true. The policy excludes known issues, most forward-looking statements, and a list of specific risks that varies by deal and by underwriter. Sellers also usually remain liable for fraud, for pre-closing taxes in many structures, for the purchase price adjustment, and for anything a specific indemnity was written around. Insurance narrows exposure sharply; it does not remove it.