Over the past decade, representations and warranties insurance (RWI) has emerged as a critical tool to mitigate risk in merger and acquisition (M&A) transactions. In fact, while RWI may initially have been seen as a novelty, it is now viewed as a relatively standard requirement in M&A transactions.

RWI policies reduce a policyholder’s risk by providing coverage for losses incurred due to a seller’s breach of representations and warranties in the purchase agreement. These policies can be either seller-side, where an insurer indemnifies the seller for losses stemming from a breach of the seller’s own representations and warranties or, more commonly, buyer-side, where the RWI policy covers the buyer for losses due to the seller’s breach. RWI can be used to partially reduce a seller’s indemnity obligations in the event of post-closing losses (i.e., by reducing the cap on a seller-funded indemnity or escrow), but the policies are now often used as a complete substitute for seller indemnities.