Representation and warranty insurance covers loss from breaches of a seller’s representations in a purchase agreement. It has become standard in mid-market transactions and changes how the agreement is negotiated.

Buy-side policies are the norm, allowing the buyer to claim directly against the carrier rather than pursuing the seller, which enables clean exits and smaller escrows.

Structure. A policy limit as a percentage of enterprise value; a retention that steps down after a period; and a term extending beyond the agreement’s own survival periods, often six years for fundamental representations.

Standard exclusions. Known issues identified in diligence; purchase price adjustments; forward-looking statements; asbestos and PFAS; and often specific matters flagged by underwriting. Pension underfunding, transfer pricing and wage-and-hour exposure are commonly excluded or sublimited.

Underwriting. The carrier reviews the diligence reports and holds an underwriting call. Thin diligence produces broad exclusions, which means the policy rewards thorough work rather than substituting for it.

Effect on negotiation. Sellers push for lower caps and shorter survival because the buyer’s real recourse is the policy. Buyers must ensure the agreement’s representations remain robust, because the policy only responds to a breach of what the agreement says.

Claims. Notice provisions are strict and the process is documentation-heavy.