Sean Auton
Robert Schaul
The representations and warranties insurance (RWI) market has seen significant shifts in recent years. After a record-breaking M&A market in 2021 drove high demand for RWI, many commentators noted that the RWI market seemed to reset in buyers’ favor in 2025 amid tepid dealflow and heightened competition among carriers.
While it’s true that premiums and retention rates have improved, two key factors lead more dealmakers to consider forgoing RWI. First, timing considerations, such as prolonged due diligence requests, along with the time needed to bring the carrier up to speed and long waits for post-close recoveries, can increase deal fatigue and legal costs. Second, carve-outs are mounting, both in issue size and type, meaning that RWI policies may not always cover the pivotal issues relevant to the target.
This is not to say that RWI coverage should always be avoided. Below are three factors to consider when evaluating whether RWI is right for a deal.
Between policy costs, increased legal spend as a result of additional diligence, deductibles (often 25 percent of the value of the policy), tighter caps on what the insurer pays out for potential breaches, collection delays, and the exclusions noted above, RWI can carry a hefty price tag.
To understand whether it’s right for your deal, start by considering these three questions:
1. What security do you hope RWI can provide?
This is where carve-outs can really impact a policy’s value. If, for instance, you’re concerned about significant exposure from cybersecurity breaches, a standard RWI policy may not help given the prevalence of data privacy issues and some RWI carriers’ standard policy to avoid the issue altogether in certain cases. A separate rider could cost another .5 percent of the total deal value—without closing all gaps in policy coverage.
In addition, since tax issues are typically carved out, dealmakers worried about the misuse of employee retention credits may not be protected by RWI. Intellectual property risks and environmental liabilities (i.e., those related to “forever chemicals”) also tend to be carved out, which often results in significant vulnerabilities in some of the highest-liability areas. Even more specific and isolated matters can be excluded from coverage, such as blanket exclusions related to biometric data collection.
Finally, regulatory uncertainty (e.g., tariffs, sanctions) plays into RWI considerations. Given the evolving nature of regulations, their implementation, and disputes over the legality of enforcement, insurers have had difficulty with appropriately pricing risks in these areas, leading to broad exclusions. For example, insurers may include broad, blanket exclusions arising from any dealings with a certain country over concern of taking on any exposure—regardless of the particular facts and circumstances.
2. Are you confident the company you’re purchasing is well run?
Forgoing RWI means buyers have to put their faith in financial and legal due diligence, as well as the management of the target company. Before making a decision on RWI, consider the following:
- Has the organization been through an outside audit of their financials? Review the quality of earnings reports, lien searches, and analyses of online searches. Innovations in AI-powered algorithmic searching and data analytics can help speed up these efforts.
- Has the organization invested in quality personnel who are appropriately focused? For instance, if the CFO is wearing multiple hats (e.g., IT, operations, international trade), that may be a red flag.
- Are all their contracts lined up? Good records and a functioning data room that demonstrate an appropriate procurement process is in place (and actually followed) are green flags,
If the diligence process shows that the target has failed to implement and comply with reasonable standards and processes, the RWI carrier will likely identify it, too, and include carve-outs or deny post-closing claims as a result.
3. How fast are you trying to close?
Since time continues to be the leading killer of most deals, speed is a perennial issue when it comes to RWI. This is a particular concern in a hot M&A market, when speed-to-close can help seal the deal.
Typically, both buyers and sellers want the deal to close quickly to capture the added value as efficiently as possible. In situations where the target is generally well-run with a couple of specific concerns, there have been cases where buyers have declined to move forward with RWI coverage in order to shorten the time to closing.
Alternatives to Reps and Warranties Insurance
If dealmakers choose not to purchase RWI, there are several other tactics they can pursue to address post-close risks adequately and cost-efficiently.
Most simply, buyers and sellers can choose to split their newfound savings between them and adjust the purchase price accordingly. They can secure an escrow guarantee that would otherwise be insured by RWI.
If a buyer chooses to purchase RWI, sellers can work to structure a deal such that the policy is the buyer’s sole post-closing remedy, save for fraud. This helps ensure that the seller has no liability for non-fraud breaches and any shortcomings in the insurance policy are entirely on the buyer’s shoulders. Therefore, what the buyer gets in insurance recovery they sacrifice in seller accountability. This can be a differentiator for a buyer, making their bid more attractive to the seller. However, if a buyer walks back its commitment, it can create significant tension and acrimony at the end of a deal (i.e., if the seller feels as though the buyer is trying to reprice a deal through the guise of demands from its RWI carrier).
Though every deal is different, the need to evaluate whether the RWI juice is worth the squeeze is a constant. Dealmakers who can successfully analyze the pros and cons will save valuable time—and money.
