Representations and warranties insurance, shortened to R&W insurance, is a policy that pays a buyer if something you promised in the purchase agreement turns out to be untrue. Its real effect on a seller is simpler than the name suggests: it lets you walk away with more of the price on the day, because the buyer is claiming against an insurer instead of against money held back from you.
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What it replaces
Without a policy, a buyer protects itself by holding back part of your price, usually in escrow, for a year or two. That money is yours only if nothing surfaces. With a policy, the escrow shrinks to a token amount or disappears, and the insurer takes the exposure instead. For a seller who wants to be finished when the deal closes rather than a year later, that difference is the entire point of the product.
Who pays, and how much
Custom varies by market and by who wants the policy. In competitive processes the buyer usually buys it and prices the premium into their bid, which means the seller pays for it indirectly; in others the cost is shared explicitly. There is also a retention, an amount the buyer absorbs before the policy responds, and that retention is frequently split between the parties. Both numbers are negotiated with the price, not after it.
Where it is available
Underwriters need a diligence file worth reading, so the product is concentrated in deals with institutional buyers and legal advisers on both sides. Sellers of businesses at the lower end of the main street market almost never see it offered, and asking for it can read as inexperience. If your buyer is a fund or a strategic acquirer with counsel, the question is worth raising in the letter of intent stage.
What it does not cover
Known problems. If diligence found it and it was disclosed, the policy excludes it and it goes back to being a price negotiation or a specific indemnity. Fraud by the seller is also excluded, which is the answer to the question of whether insurance lets you be careless with your disclosures. It does not. It moves the risk of the honest mistake, not the dishonest one.
Questions people ask about R&W insurance
Does R&W insurance mean no escrow at all?
Often a much smaller one. Buyers commonly still hold a token amount, and the policy retention sits underneath the cover. A seller should read the two numbers together, because a large retention with a small escrow can leave the same exposure under a different name.
Can a seller buy the policy?
Sell side policies exist, but the standard product is buy side because the buyer is the party making the claim. Where a seller wants the certainty, the practical route is to negotiate that the buyer takes out a buy side policy and the escrow drops accordingly.
How long does the cover run?
Typically longer than a negotiated escrow would, often three years for general representations and longer for fundamental ones such as title and tax. That mismatch is one reason buyers accept it: they get more protection while you get paid sooner.
Is it worth it on a small deal?
Usually not, because premiums have minimums that make the effective rate punitive below a certain deal size, and underwriters will not spend time on a file with no formal diligence behind it. Below the institutional buyer threshold a negotiated escrow remains the normal answer.