What Is Representations and Warranties Insurance?

What Does Representations and Warranties Insurance Cover?

If due diligence later uncovers an inaccurate statement in the sale agreement, the buyer and seller may look to the policy and their remaining contract protections. ^2,1

Representations and warranties insurance can protect a buyer or seller from financial loss when a statement in a business purchase agreement is inaccurate. ^2,1

Statements in the Sale Agreement

Representations and warranties are statements of fact about the business being sold; an indemnity is a separate promise to be responsible for another party’s loss if a described event occurs. ¹

Who Is Insured and Who Can Recover

Confirm whether the buyer or seller is insured, and ask who can recover under the policy and how that recovery interacts with claims against the seller. ^1,2,3

Who Needs Representations and Warranties Insurance?

Consider R&W when you're buying or selling a business through a stock or asset purchase. Review it alongside the purchase agreement, disclosures and due-diligence findings. ^2,3,1

Representations and Warranties Insurance Coverage Examples

What happened

An Inaccuracy Comes to Light After Closing

After buying a business, you discover that a statement in the purchase agreement was inaccurate.

How coverage may help

R&W may cover financial loss from an insured inaccuracy. The representations, disclosures and policy terms determine the scope and how recovery works alongside seller indemnity. ^2,1,3

What happened

Diligence Finds a Problem Before Signing

Your team identifies a potential problem before signing the purchase agreement.

How coverage may help

Known issues can be treated differently from inaccuracies discovered later. Disclose the problem so the insurer can explain whether it is excluded or otherwise addressed. ^2,1,3

How Do You Compare Representations and Warranties Insurance Coverage and Costs?

The Purchase Agreement and the Policy

Compare the representations in the purchase agreement and disclosure schedules with the statements the policy is intended to insure. ^2,1

Limit, Retention and Duration

Compare the proposed limit and retention with the size of the deal and the remaining seller indemnity, and ask how long the policy runs after closing. ^2,1

A deal may retain seller indemnity, escrow or other security even when insurance is purchased. Compare those protections with the policy's limit and retention. The insurance and purchase agreement need to work together; buying a policy doesn't itself remove the seller's remaining contractual obligations. ^1 2,1

What Known Issues Should You Discuss?

Ask how the quote treats issues already known from due diligence or disclosure, as opposed to inaccuracies that were not known when the deal was signed. ^3,1,2

How Does Representations and Warranties Insurance Compare With Related Coverage?

Other Deal Products

Tax, contingent-liability and other transaction products are separate from representations and warranties insurance; list each product in the quote rather than treating the package name as complete. ^2,1,3

Ongoing Management Liability

Representations and warranties insurance is arranged around a specific transaction; it is a different discussion from the company’s ongoing directors and officers or management liability coverage. ^2,1,4

What Do You Need for Representations and Warranties Insurance Quotes?

Prepare the draft purchase agreement and disclosure schedules, due-diligence reports, a description of the buyer, seller and transaction, and any issues already identified that should be discussed with the insurer. ^2,3,1

Deal Documents and Diligence

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Representations and Warranties Insurance: Key Terms in Plain English

Representation or Warranty

A statement of fact about the business being sold, made in the transaction agreement. ¹

Seller Indemnity

A separate promise by the seller to be responsible for a described loss; compare it with the policy and remaining escrow. ^1 1

Frequently Asked Questions About Representations and Warranties Insurance