Reps & Warranties Insurance (RWI)

What is reps & warranties insurance (RWI)?

Reps & warranties insurance (RWI, in German Garantieversicherung) refers to an insurance that covers financial losses from the breach of warranties in a company purchase agreement. Warranties are the seller's contractual assurances about the condition of the company. The insurance replaces the seller's liability in whole or in part: if an assurance proves to be false, the insurer pays instead of the seller. In the European market it is usually called W&I insurance (warranty and indemnity insurance).

The insurance is taken out in connection with a company purchase agreement and aligned with its catalogue of warranties. The parties involved are the insurer, the policyholder, as a rule the buyer, a specialised insurance broker and the advisers of both sides. It is common in company sales in an auction process with several interested buyers and in sales by financial investors from the field of private equity. These want to distribute their proceeds to their investors after completion (closing, the transfer of the shares against payment) without a long post-closing liability. In funding rounds it occurs much less often.

Buy-side policy and sell-side policy

With the buy-side policy, the buyer is insured and asserts claims arising from breaches of warranty directly against the insurer. The insurer waives recourse against the seller, except in cases of intent or fraud. This form is the rule in the European market. It largely relieves the seller of liability and spares the buyer from enforcing claims against sellers, who often remain in the company as managing directors.

With the sell-side policy, the seller is insured against its own liability under the purchase agreement. The buyer continues to direct its claims to the seller, who recovers from the insurer. Even this policy does not cover the seller's intent or fraud. In an auction process the seller often obtains quotes already and later hands the matter over to the buyer, who then takes out the policy as policyholder.

Scope of cover and exclusions

Insured are losses from breach of the warranties given in the purchase agreement and often from the tax indemnity, provided the underlying circumstances were unknown at inception. The limit of liability (policy limit) is set case by case, often as a fraction of the purchase price. The retention is the amount up to which losses are not borne by the insurer. The policy period can be longer for individual groups of warranties than the limitation period in the purchase agreement.

Known circumstances

The basic idea of warranty insurance is to cover unknown risks. What the buyer's transaction team actually knew before inception is therefore excluded. Also excluded is what is disclosed in the data room or in the list of disclosures (disclosure schedule). The same applies to everything that emerges from the reports of the due diligence, the buyer's review of the company. The buyer confirms at signing, and often again at closing, in a declaration (no claims declaration) that no breach of warranty is known to it. Whether breaches that arise only between signing and closing are covered is regulated separately in the policy.

Typical further exclusions

• Purchase price adjustments and claims arising from covenants
• forward-looking statements, plans and forecasts
• underfunding of pension commitments and the usability of tax loss carryforwards
• fines and penalties, to the extent they are not insurable
• transaction-specific exclusions for areas that were not reviewed or only inadequately reviewed in the due diligence

Taking out W&I insurance: process up to binding cover

1. Quotes: On the basis of the draft agreement and the scope of the due diligence, the broker obtains non-binding quotes from several insurers (non-binding indication).
2. Review: The selected insurer is given access to the data room and the due diligence reports, in some cases against a review fee. In an underwriting call it questions the buyer's adviser team.
3. Negotiation: Scope of cover, exclusions and definitions are aligned with the purchase agreement.
4. Binding: With signing of the purchase agreement, cover becomes binding upon delivery of the no claims declaration. The premium falls due as a single payment.

The process runs in parallel with the due diligence and the contract negotiation. If the insurer is brought in late, exclusions threaten for areas that it cannot review in the remaining time.

Cost of warranty insurance

The premium is usually quoted in the market as a percentage of the policy limit, not of the purchase price. It depends on the policy limit, retention, sector, risk profile, legal system and quality of the due diligence and is paid once. Insurance tax is levied on the premium, in Germany 19% (as of 2026). Where applicable, a separate broker fee and adviser costs are added.

For smaller transactions, warranty insurance is often uneconomic because minimum premiums and review effort hardly fall while the insured risk is small. Some insurers do not underwrite very small transactions at all.

Effects on the purchase agreement

With a buy-side policy, the seller's liability cap for business-related warranties often falls to a part of the retention or to a symbolic amount. A holdback in an escrow account falls away or is limited to known risks. The catalogue of warranties often becomes more buyer-friendly but must remain insurable: a warranty excluded by the insurer is of little value to the buyer if the seller hardly remains liable. Known risks continue to be dealt with by the parties through indemnities, a purchase price reduction or a separate security.

Worked example: loss and cost of W&I insurance

The shareholders of a software company sell all shares for EUR 40 million. The buyer takes out a buy-side policy with a policy limit of EUR 8 million and a retention of EUR 200,000. Under the purchase agreement, the sellers are liable for business-related warranties only up to EUR 100,000, that is, half of the retention. For the example, a premium of 1.2% of the policy limit is assumed. Fourteen months after closing, it emerges that the balance sheet warranty has been breached: unrecorded liabilities lead to a loss of EUR 1.1 million.

• Retention: The first EUR 200,000 of the loss is not borne by the insurer.
• Of this, the sellers bear up to their cap of EUR 100,000, and the buyer the remaining EUR 100,000.
• Insurer's payment: EUR 1.1 million minus EUR 200,000 = EUR 900,000
• Check: 900,000 plus 100,000 plus 100,000 = EUR 1.1 million
• Remaining policy limit: EUR 8 million minus EUR 900,000 = EUR 7.1 million
• Cost of the policy: 1.2% of EUR 8 million = EUR 96,000 premium, plus 19% insurance tax of EUR 18,240, together EUR 114,240

Without a policy, the sellers, with a general cap of, for example, 15% of the purchase price, would have had up to EUR 6 million at risk and would have borne the loss of EUR 1.1 million largely themselves. Had the due diligence already uncovered the matter, it would have been excluded from cover. The buyer would then have had to secure it through an indemnity from the sellers, typically combined with a holdback.

Distinction: warranty insurance, warranty, indemnity and D&O

• Warranty: the seller's contractual liability. The insurance assumes its economic consequences but does not change the content of the warranties.
• Indemnity: covers known risks and therefore usually remains with the seller.
• Escrow account: secures claims with part of the proceeds. Warranty insurance replaces this security with the payment obligation of an insurer.
• D&O insurance: covers the personal liability of managing directors and other board members, not liability under a company purchase agreement.

Common mistakes

• Late involvement. Without sufficient time for the review, the insurer excludes whole areas.
• Incomplete due diligence. What the buyer does not review, the insurer often does not insure.
• Policy and contract not aligned. If the definition of loss, knowledge rules or time limits differ, coverage gaps arise that the seller, with little liability of its own, does not absorb.
• Known risks assumed to be insured. Findings from the due diligence are excluded and need their own arrangement.
• Incomplete disclosure. If the seller conceals known circumstances, the insurer can take recourse in the event of fraud, and the benefit of the policy is lost for the seller.

Frequently asked questions

What does W&I insurance cost and who pays for it?

A one-off premium is charged, calculated as a percentage of the policy limit, plus 19% insurance tax (as of 2026) and, where applicable, broker and review fees. Who bears it is a matter of negotiation. With a buy-side policy the buyer often pays and takes the cost into account in its purchase price offer. Splitting it with the seller also occurs.

Does the seller remain liable despite warranty insurance?

To a limited extent. The seller is usually liable up to a small cap, for indemnities for known risks and without limit in cases of intent and fraud. Recourse by the insurer is as a rule limited to intent and fraud.

Which risks does warranty insurance not cover?

Above all known risks, that is, everything the buyer knew before inception or that was disclosed. Typical further exclusions are purchase price adjustments, plans, pension underfunding and the usability of loss carryforwards.

From what transaction size is warranty insurance worthwhile?

There is no universal minimum size. It makes sense to compare the total cost of the policy with the amount the seller would otherwise have to assume as liability and holdback. It also matters that bidders with a policy can offer the seller little liability of its own.

Is RWI the same as W&I insurance?

Yes, in principle. RWI is the usual designation in the US market, W&I insurance the one common in the European market. Differences lie in market practice and policy design, not in the basic principle.

The Roemer Capital view

Roemer Capital clarifies early in the process whether warranty insurance is an option for a sale, because the answer determines the negotiating concept for liability, holdback and the catalogue of warranties. To this end, it compares the total cost of the policy with the liability risk and the tied-up proceeds that would remain with the sellers without insurance.

If a policy is an option, Roemer Capital coordinates the timetable so that the broker and insurer receive the due diligence reports in good time. If it is not economic for the size of the transaction, Roemer Capital helps negotiate the classic protection through caps and escrow account. The policy itself and its contractual alignment are the responsibility of the broker and the law firm.