Representations and warranties (R&W) insurance pays the buyer when a seller's representations in the purchase agreement turn out to be false — covering losses the buyer would otherwise have to recover through seller indemnification, which is often impractical. It has become nearly universal in mid-market and large-cap private M&A. For most ETA deals, it is not available. Understanding where the floor is, what it costs when it is accessible, and what alternatives to use below that floor is essential deal structuring knowledge.
What R&W Insurance Actually Covers
R&W insurance replaces the buyer's recourse against the seller for breaches of representations in the purchase agreement. If the seller represented that there are no pending lawsuits and one surfaces post-close, or represented that the business has no environmental liabilities and one appears, R&W insurance pays the claim rather than requiring the buyer to sue the seller. This makes closing cleaner (sellers prefer a clean exit), reduces escrow requirements, and gives buyers a creditworthy counterparty for claims.
A standard R&W policy covers the seller's representations about: financial statements, tax matters, legal compliance, intellectual property, material contracts, and employee matters. It does not cover: known issues (anything disclosed in the disclosure schedules), purchase price adjustments (WC peg disputes), environmental matters excluded by policy terms, forward-looking projections, and intentional fraud.
The Deal Size Problem
The minimum economically viable R&W policy in the U.S. market currently has a floor premium of approximately $150,000–$180,000 regardless of deal size, according to AIG and Lockton M&A market surveys. This makes R&W insurance economically nonsensical for deals below $15M–$20M — the premium alone represents 0.75%–1.2% of deal value, before deductibles (typically 1% of enterprise value) and legal costs to implement the policy.
The AIG/Lockton 2024 M&A insurance survey found R&W adoption at approximately 91% for deals above $100M, 78% for $50M–$100M, declining sharply to 34% for $10M–$25M deals and approximately 8% for deals below $10M. Most self-funded ETA deals — targeting businesses with $500K–$3M in EBITDA, implying enterprise values of $2M–$15M — fall entirely below the practical floor.
What R&W Costs When It Is Accessible
For deals in the $10M–$50M range where R&W is sometimes viable, expect: a premium of 2.5%–4.5% of policy limits (which are typically set at 10%–20% of enterprise value), a retention (deductible) of 0.5%–1.0% of enterprise value, and a policy period of 3–6 years for fundamental representations (tax, title, capitalization) and 18–24 months for general representations. A $20M deal with $3M of coverage would cost approximately $75,000–$135,000 in premium plus the retention.
For ETA searchers operating near or above the threshold — particularly those pursuing $8M–$15M deals with SBA financing plus equity — it is worth getting a broker quote (Aon, Lockton, Marsh, or Willis Towers Watson are the major brokers) before ruling it out. The availability and pricing have improved significantly since 2020.
What to Use Instead: The Sub-$10M Toolkit
For deals where R&W insurance is not viable, buyers have four primary protection mechanisms. First, indemnification holdbacks: retain 10–15% of the purchase price in escrow for 12–24 months, released to the seller only after representations have survived the lookback period. This is the most common substitute. Second, seller note offset rights: include contractual provisions allowing you to offset any representation breach damages against the outstanding seller note balance rather than filing a claim.
Third, comprehensive disclosure schedules: negotiate detailed seller disclosure schedules (the documents where the seller lists exceptions to their representations) during due diligence rather than accepting generic carve-outs. The more specific the disclosure, the more precisely you know what is and is not covered. Fourth, purchase price escrow with survival periods: survival periods for representations are typically 18–24 months for general reps and indefinite for fundamental reps (title, authority, capitalization, taxes). Make sure the escrow or seller note balance is sufficient to cover potential claims throughout the survival period.
One Practical Workaround: Specific Indemnities
Where you identify a specific, quantifiable risk during diligence — a pending employee dispute, an unresolved tax audit, a customer relationship that may not survive the transition — negotiate a specific indemnity rather than relying on general representation coverage. A specific indemnity targets the exact risk, survives longer than general reps, and does not require R&W insurance to have teeth. SBA lenders will often approve deals with specific indemnities in place for identified risks that would otherwise make the loan untransperable.