Warranty and Indemnity Insurance

What Is Warranty and Indemnity Insurance?

Warranty and indemnity insurance (W&I insurance, also called representations and warranties insurance or R&W insurance in the US) is a specialised insurance product that protects the buyer or seller in an M&A transaction against financial losses resulting from breaches of the representations and warranties made in the sale and purchase agreement (Investopedia). The policy effectively transfers the indemnification obligation from the seller to the insurance carrier.

W&I insurance has become a standard feature in private equity and mid-market M&A transactions, fundamentally changing how deal risk is allocated between buyers and sellers.

How W&I Insurance Works

Buy-Side Policy (Most Common)

The buyer purchases the policy and is the insured party. If the seller’s representations prove false and the buyer suffers a loss, the buyer claims against the insurance policy rather than against the seller.

Sell-Side Policy (Less Common)

The seller purchases the policy to back-stop its own indemnification obligations. If the buyer brings a warranty claim, the seller claims against the policy to fund the indemnity payment.

Process

1. Non-binding indication (NBI) — the insurer reviews the transaction summary and provides a preliminary quote (premium, retention, coverage)
2. Underwriting — the insurer reviews the SPA, disclosure schedules, due diligence reports, and management presentations
3. Policy negotiation — the insurer and insured negotiate coverage terms, exclusions, and limits
4. Binding — the policy is bound at or before signing/closing
5. Claims — if a breach occurs, the insured files a claim with the insurer, who investigates and pays covered losses

Key Terms

Term	Typical Range
Policy limit	10–30% of enterprise value
Premium	1.0–2.5% of policy limit
Retention (deductible)	0.5–1.0% of enterprise value (often tipping to nil after 12–18 months)
Policy period	3–7 years (matching SPA survival periods)
Coverage	Breaches of seller’s reps and warranties

Why W&I Insurance Is Used

Benefits for Sellers

• Clean exit — the seller can distribute sale proceeds immediately without retaining escrow or holdback reserves for potential claims
• Reduced liability — the seller’s indemnification obligation is limited to a nominal amount (often $1), with the insurance absorbing the risk
• Fund distributions — private equity sellers can return capital to LPs without holdback uncertainty
• Competitive advantage — offering a W&I-backed clean exit can make a bid more attractive in an auction process

Benefits for Buyers

• Recourse certainty — the buyer has recourse against a creditworthy insurer rather than a seller who may dissipate proceeds or become insolvent
• Relationship preservation — the buyer can make claims against the insurer rather than the seller, preserving the commercial relationship (especially important when the seller retains a management role or rollover equity)
• Enhanced protection — policy limits may exceed what the seller would agree to in a negotiated indemnity cap
• Competitive bidding — offering a W&I-backed structure with minimal seller indemnity can strengthen the buyer’s bid

Standard Exclusions

W&I policies typically exclude:

• Known issues — matters the buyer’s deal team actually knew about before the policy was bound (see sandbagging)
• Forward-looking warranties — projections, forecasts, and business plans
• Purchase price adjustments — working capital and debt-like item adjustments
• Fines and penalties — criminal fines or regulatory penalties that are uninsurable by law
• Transfer pricing — secondary tax adjustments arising from intercompany pricing
• Specific exclusions — matters identified during underwriting that the insurer is unwilling to cover

W&I Insurance Market

The W&I insurance market has grown rapidly:

• Global premium volume has grown from under $1B in 2015 to over $5B by 2025
• W&I is now used in the majority of private equity transactions in the US, Europe, and Australia
• Competition among insurers has driven premiums down and coverage breadth up
• Claims frequency runs at approximately 15–25% of policies, with the majority resolved within 18 months

W&I Insurance in Asia Pacific

The W&I insurance market in Asia Pacific has matured significantly. In Australia, W&I insurance is standard in private equity transactions and increasingly common in mid-market deals, with a deep market of local and global insurers. In Singapore and Hong Kong, W&I usage is growing as international deal practices are adopted in larger transactions. In Japan, the market is nascent but developing, with awareness increasing as global sponsors bring W&I expectations to cross-border transactions. In India, W&I insurance is gaining traction, particularly for deals with foreign buyers who are familiar with the product from other markets. Key APAC considerations include the interaction of W&I policies with local tax, employment, and environmental laws, which may require jurisdiction-specific policy endorsements. AI-native platforms like Amafi help advisers evaluate W&I insurance options and structure deal terms that optimise risk allocation across Asia Pacific transactions.