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Transactional insurance in M&A: representations, warranties, and indemnities

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Transactional insurance—primarily representations and warranties insurance (RWI) and indemnity insurance—has become a critical tool in mergers and acquisitions (M&A) for mitigating post-closing risks and accelerating deal execution. By shifting potential liabilities from buyers and sellers to insurers, these policies streamline negotiations, enhance certainty of proceeds, and facilitate competitive bidding in complex or high-value transactions.



The role of representations and warranties insurance in M&A.

Representations and warranties insurance (RWI) protects buyers (or sometimes sellers) against losses arising from breaches of representations and warranties made in the purchase agreement. Its benefits include:

  • Reducing post-closing disputes → Claims are settled with insurers rather than between buyer and seller.

  • Accelerating negotiations → Limits the need for prolonged indemnity discussions.

  • Increasing bid competitiveness → Buyers using RWI can offer cleaner terms and reduced escrow holdbacks.

  • Protecting seller proceeds → Enables sellers, particularly private equity funds, to distribute sale proceeds faster.

RWI has become standard in competitive auctions where deal certainty and speed are priorities.



Types of transactional insurance commonly used in M&A.

Type

Purpose

Typical Beneficiary

Use Case

Representations & warranties insurance (RWI)

Covers financial losses from inaccurate reps/warranties

Buyer or seller

Most common in private equity exits

Tax liability insurance

Protects against unexpected tax exposures

Buyer or seller

Cross-border M&A, restructuring-driven deals

Contingent liability insurance

Covers identified risks excluded from RWI policies

Buyer

Environmental, regulatory, or IP disputes

Indemnity insurance

Protects sellers against buyer claims

Seller

Used in high-value deals where sellers seek clean exits

By tailoring coverage to transaction risks, insurance packages reduce friction and accelerate timelines.


Strategic benefits for buyers and sellers.

For buyers:

  • Secures financial protection from unknown liabilities.

  • Enhances bid competitiveness in auctions by accepting lower indemnification caps.

  • Improves post-closing integration focus by reducing exposure to historical issues.


For sellers:

  • Maximizes proceeds by reducing escrow amounts or eliminating indemnity reserves.

  • Enables faster fund distributions for private equity firms exiting investments.

  • Minimizes personal liability for founders or management teams in founder-led deals.

Transactional insurance aligns buyer and seller interests, often enabling deals that might otherwise stall due to risk allocation disputes.


Integration with indemnities and escrow structures.

Historically, buyers relied on indemnity agreements and escrow holdbacks to manage representation and warranty breaches. Transactional insurance redefines this framework by:

  • Reducing escrow requirements → Less capital tied up post-closing.

  • Expanding risk coverage → Protects against risks previously excluded from seller indemnities.

  • Enabling clean exits → Sellers are relieved of long-tail liability exposure.

In many competitive private equity auctions, RWI policies replace most indemnity obligations, shifting risk entirely to insurers.


Underwriting process and cost considerations.

Securing RWI or indemnity insurance involves a structured underwriting process:

  1. Risk assessment → Insurers review due diligence findings, purchase agreements, and financial disclosures.

  2. Policy structuring → Defines coverage limits, exclusions, and retention amounts.

  3. Pricing negotiations → Premiums typically range from 2% to 4% of coverage limits, depending on transaction complexity.

  4. Claims management → Buyers file claims directly with insurers, avoiding disputes with sellers.

Timing is critical—insurers are often engaged early in the process to ensure policies are bound before signing or closing.


Transactional insurance trends and growing adoption.

  • Private equity exits → RWI has become nearly universal in competitive PE auctions to enable “clean break” sales.

  • Cross-border M&A → Policies help mitigate jurisdictional risks, especially where local liabilities are uncertain.

  • Complex carve-outs → Insurance bridges gaps when historical reporting is incomplete or asset separations create unknown exposures.

  • Tax-driven restructurings → Specialized tax liability coverage has grown alongside cross-border tax planning needs.

In highly competitive environments, RWI is now a differentiator in securing winning bids.


Examples of transactional insurance in practice.

  • Blackstone’s acquisition of a healthcare services company → RWI enabled an accelerated timeline by avoiding extended indemnity negotiations.

  • Silver Lake and Twitter (2022) → Used insurance structures to protect against historical user data compliance claims.

  • KKR and Unilever’s spreads business (2018) → Tax liability insurance addressed complex cross-border exposures during the $8 billion transaction.

These examples highlight how insurance reduces friction and improves certainty in high-value, regulated, or multi-jurisdictional deals.



Transactional insurance accelerates M&A execution while mitigating risk.

By transferring liabilities to insurers, representations, warranties, and indemnity insurance reshape traditional risk allocation models in M&A. Buyers gain greater protection, sellers maximize proceeds, and competitive tension increases in auctions where clean exits matter.

As deal sizes grow and regulatory risks become more complex, transactional insurance has evolved into a core enabler of modern M&A transactions, facilitating smoother negotiations and faster closings.


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