R&W insurance pays for itself when the indemnity cap drops below 5 percent of price and the escrow comes out of the deal. Most LMM transactions don't pencil that low. The default answer for sub-$30M deals is no policy. The default answer for $30M plus deals is run the math.

This post walks the cost stack, the deal sizes where R&W actually makes sense, the difference between buyer-side and seller-side policies, and the LOI language that decides who pays and who's the policyholder.

What R&W insurance does

A representations and warranties insurance policy transfers the seller's indemnity exposure to an insurer. If a buyer-side policy is in place, the buyer files claims with the insurer instead of clawing back from the seller's escrow. If a seller-side policy is in place, the seller pays out from the policy instead of from their own balance sheet.

The headline benefit: a clean exit for the seller. No 12 to 18 month escrow tying up 10 to 15 percent of price. No retrade fights over indemnity claims six months post-close. The buyer gets paid through insurance; the seller walks with the cash.

That's the headline. The math is harder.

The cost stack

R&W insurance has three cost layers:

• Premium: typically 2.5 to 4 percent of policy limit. Lower end for clean financials and known sectors. Higher end for complex deals or first-time policies.
• Retention (deductible): typically 0.5 to 1.0 percent of enterprise value, with a floor of around $250K. The retention sits between the seller's residual exposure and the insurer's first dollar.
• Underwriting fees and broker commission: $30K to $75K depending on broker and policy size. Some brokers absorb this in the premium quote.

Worked example: $30M deal, policy limit at 10 percent of price ($3M), retention at 1 percent of price ($300K).

| Cost line | Math | Amount | |---|---|---| | Premium | $3M × 3.5% | $105,000 | | Retention (capital tied up, not cost) | 1% of EV | $300,000 | | Underwriting and broker | flat | $50,000 | | All-in cost | premium + fees | $155,000 |

That $155K is the price tag for replacing a $3M escrow holdback. Plus the $300K retention which sits on someone's balance sheet for the survival period.

When R&W pencils

Three conditions need to hold for the math to work in LMM.

1. Deal size above $30M

Below $30M of enterprise value, the premium and fees become a meaningful percentage of price. A $20M deal with a $2M policy at 4 percent premium plus $50K fees is $130K all-in. That's 0.65 percent of price for a deal where the seller's escrow alternative might only have been $200K to $300K of working capital tail risk.

The market for sub-$15M policies is thin. Most underwriters won't quote. The ones that do, charge 4 to 5 percent on the limit and require a $250K minimum retention. The math rarely works.

Above $30M, the premium percentage holds steady but the absolute dollar value of the escrow being replaced grows fast enough that the policy clearly pays.

2. Indemnity cap drops materially

The seller's leverage in the LOI is the trade: "we'll buy a policy if you drop the indemnity cap from 10 percent to 1 percent of price." If the buyer accepts a 1 percent cap, the seller gets 9 percent of price freed up that would otherwise sit in escrow.

Without that cap drop, the policy is duplicative coverage on top of the seller's existing indemnity exposure. The seller paid the premium and still has the same escrow.

The cap drop is the entire point. Sellers who buy policies without negotiating the cap down to 1 to 2 percent of price are spending premium for no balance sheet relief.

3. The buyer is sophisticated enough to underwrite the policy

R&W insurance requires the buyer's deal team to coordinate with the underwriter during diligence. The underwriter conducts a parallel review of the data room, attends key calls, and may require additional disclosures.

PE buyers and large strategics know how to run this in parallel without slowing the deal. Smaller strategics, family offices, and first-time buyers sometimes don't. If the buyer's deal team has never used R&W before, the underwriting process can add 2 to 4 weeks to the timeline.

Buyer-side vs seller-side policy

The default in modern LMM deals is buyer-side. Premium gets paid by the buyer (or split, see below) but the policy is named to the buyer. The buyer files claims directly with the insurer.

Seller-side policies exist but are rare. They're used when the seller wants additional protection against indemnity exposure that the buyer-side policy doesn't fully transfer (e.g., specific known risks the buyer-side policy excludes). The seller-side policy sits on top of the buyer-side policy.

In LMM, the buyer-side policy with the seller paying premium is the most common structure. The seller pays for the buyer's coverage, but the seller benefits because the cap drops.

The LOI language that matters

Three terms decide whether R&W is set up correctly in the deal:

Who pays the premium

Standard split in LMM: 50/50 between buyer and seller, or seller pays in exchange for cap reduction. Buyer paying 100 percent is rare.

The cleanest LOI language:

Who's the policyholder

Almost always the buyer for a buyer-side policy. But the LOI should specify, because some buyers try to name themselves AND require seller indemnity above the policy limit.

That last sentence is the key. Without it, the seller still has uncapped exposure on general reps even with a policy in place.

Retention split and how it interacts with escrow

The retention is the gap between the seller's residual exposure and the insurer's first dollar. If the deal has a small remaining escrow plus retention, the seller is double-exposed.

Clean LOI:

When R&W doesn't make sense

Three deal types where R&W consistently doesn't pencil:

1. Sub-$15M deals. Premium percentage is too high, retention floor eats the savings.
2. Asset deals with simple S&P. The seller's exposure on an asset deal is already lower. Adding insurance is overkill.
3. Distressed sales. The underwriter won't quote, or the policy quoted has so many exclusions it's effectively no coverage.

The 2026 market

R&W premium rates have hardened over the last 18 months. Underwriters who were quoting 2 to 2.5 percent in 2023 are quoting 3 to 4 percent in 2026. Capacity has tightened, especially for cyber-heavy and AI-related sectors.

What changed: claims experience improved through 2020 to 2023, premiums dropped, capacity expanded. Then a wave of claims from 2022 to 2024 deals hit the market and underwriters repriced. Expect the harder market to persist into 2027.

For deals at the edge of pencil-or-not, this matters. A 1 percent premium increase on a $5M policy is $50K, which can flip the cost-benefit on a borderline deal.

The decision framework

Three questions decide whether R&W is right for the deal:

1. Is enterprise value above $30M? If no, default to no policy.
2. Will the buyer accept indemnity cap reduction to retention amount? If no, the policy is duplicative and not worth the premium.
3. Does the buyer's deal team know how to coordinate underwriting? If no, expect the timeline to expand.

Three yeses, run the math and probably do the policy. Any no, default to traditional escrow structure with negotiated indemnity terms.

Tools and references

For LOI drafting that includes R&W terms, see the LOI Checklist.

For the indemnity package design that R&W replaces, see The Earnout Structuring Matrix (which also covers cap and basket design).

If your data room isn't ready for R&W underwriting, see the Sell Side Diligence Prep Checklist. The underwriter reviews the same items the buyer reviews.

Bottom line

R&W insurance pays for itself in LMM when the deal is above $30M, the buyer accepts a cap reduction to retention, and the buyer's team can run underwriting in parallel. Below those thresholds, the math doesn't work.

The premium isn't the cost. The cost is what the seller gives up: control over which claims get paid, retention dollars tied up, underwriting timeline added. The benefit isn't insurance. The benefit is a clean exit with no escrow tail.

Run the math before signing the LOI. Don't accept a policy that doesn't drop the cap.

Not legal or insurance advice. Have counsel and a broker review and customize for the specific deal.

FAQ

What's a typical R&W premium percentage in 2026? 2.5 to 4 percent of policy limit for clean LMM deals. Higher for complex or first-time policies. Premium has hardened over the last 18 months.

Who pays the premium? In LMM, typically split 50/50 between buyer and seller, or seller pays 100 percent in exchange for cap reduction. Buyer paying 100 percent is unusual.

What's retention? The gap between the seller's residual exposure and the insurer's first dollar. Typically 0.5 to 1.0 percent of enterprise value with a $250K floor.

Does R&W replace escrow? It can, if the LOI is written to cap seller's indemnity at the retention amount. Without that cap reduction, the policy sits on top of escrow rather than replacing it.

What's the difference between buyer-side and seller-side policy? Buyer-side: insurer pays the buyer for indemnity claims. Seller-side: insurer pays the seller for amounts the seller has to pay out. Buyer-side is the default in LMM.

How long does underwriting take? 2 to 4 weeks if the deal team is experienced. Up to 6 weeks if the buyer hasn't used R&W before. Plan for the longer end and start the underwriter early.

What does R&W not cover? Known risks (anything in the disclosure schedule), purchase price adjustments (working capital, debt), specific carve-outs in the policy (cyber claims older than X years, certain regulatory areas). The exclusions list is policy-specific and worth reviewing line by line.