Managing Representation & Warranty Insurance Claims: What Buyers and Sellers Need to Know

Representation and warranty insurance (RWI) is now a standard feature of modern M&A transactions, utilized in roughly two-thirds of middle-market private M&A transactions and up to three-quarters of PE-sponsored deals, per recent market surveys. The legal community has produced extensive guidance on obtaining RWI, such as structuring the policy, negotiating exclusions, and managing the underwriting process, but what has thus far received less attention is what happens when the policy is actually needed. For most buyers, navigating an RWI claim is uncharted territory; each policy is custom built around a single deal, and the claims process operates under dynamics unlike conventional insurance. This alert addresses the key considerations buyers and sellers should understand once a potential breach surfaces.

Assessing Whether You Have a Viable Claim

The first step upon discovering a potential breach, before calling the insurer, is to assess with counsel whether the facts plausibly support a covered claim. RWI policies cover inaccuracies in the seller’s representations and warranties as of the date they were made. An unexpected post-closing business disappointment is not a breach, and declining revenue after closing or an operational issue that emerges under new management does not trigger coverage unless a connection can be made to a representation that was false at the time it was given. Buyers should also confirm the loss exceeds the policy retention (typically 0.5%–1.0% of transaction value) and is not subject to a policy exclusion. Common exclusions include matters identified in the disclosure schedules, issues known to deal team members at signing, purchase price adjustments, forward-looking statements, and breaches of covenants.

Importance of Timely Notice

RWI coverage requires that a claim both arise from a pre-closing breach and that the insurer be notified within the policy period, which is typically three years for general representations and six years for fundamental representations and tax matters. Most policies require notice “as soon as reasonably practicable” once the buyer becomes aware of a potential breach. Delayed notice gives the insurer grounds to argue prejudice to its investigation and may impair the buyer’s ability to obtain the insurer’s consent before incurring significant defense costs or settling a related third-party claim. Because policy retentions are calculated in the aggregate rather than per-claim, providing adequate notice to the insurer can also improve recovery on future claims. Buyers should carefully track cumulative utilization of the policy retention with counsel.

Insurer Scrutinization

Once the insurer is notified of a claim, it will conduct its own investigation, which is highly transaction-specific and unlike conventional insurance claims. The insurer’s first inquiry will be whether the buyer knew, or should have known, about the breach before closing. The insurer will review the original data room, diligence memos, investment committee presentations, and board materials for any reference to the subject matter of the breach, which it may characterize as “actual knowledge” at signing. Before the insurer begins its review, counsel who handled the original deal should conduct a privilege and relevance audit of those materials and assess how the insurer is likely to characterize what it finds.

How the buyer calculates its loss is often the most contested aspect of a claim. Buyers should not limit claimed losses to direct out-of-pocket amounts. Where a breach caused a recurring impairment to the financial metrics underlying the purchase price, an EBITDA-multiple “diminution in value” claim may be available and substantially larger. The Delaware Court of Chancery’s 2025 decision in In re Dura Medic validated this approach, holding that a recurring (not necessarily permanent) diminution in EBITDA is sufficient to support multiple-based damages. This ruling aligns with the most recently available claims data; for instance, according to the Aon 2025 Transaction Solutions Claims Study, the share of North American RWI claims seeking greater than dollar-for-dollar recovery rose from 14% on 2016–2019 policies to 23% on 2021–2024 policies, and insurers surveyed reported that percentage is still climbing.

Seller Concerns

In the prevailing buy-side RWI structure, sellers are typically shielded from insurer subrogation, except in cases of fraud, which is generally defined as actual, knowing misrepresentation with intent to deceive. Sellers also typically retain exposure for purchase price adjustments and, to the extent separately negotiated, pre-closing tax indemnities. RWI’s built-in tax coverage excludes accrued taxes not yet payable and is narrower than a well-negotiated standalone seller indemnity. In transactions where the seller rolls equity or stays on post-closing as management, the insurer’s fraud-based subrogation rights follow that individual regardless of the absence of a formal indemnity obligation.

Purchase Agreement Considerations

The strength of an RWI claim greatly depends on decisions made while negotiating the definitive purchase agreement. A “Losses” definition limited to direct, out-of-pocket amounts may foreclose multiple-based recovery. Anti-sandbagging provisions must be carefully aligned with the policy’s knowledge exclusion, and sellers should note that under Delaware’s default rule, absent an express anti-sandbagging clause, buyers may bring post-closing claims on matters known prior to closing. Buyers should also preserve the materiality scrape; most buy-side policies disregard materiality qualifiers when assessing breach and calculating loss, and surrendering the scrape narrows recoverable damages, not just seller liability. These drafting choices are often overlooked but can be determinative when a claim arises.

While RWI remains a powerful tool for facilitating M&A transactions, its value is only realized if buyers are positioned to make effective claims when breaches surface. Counsel who understands both the original transaction and the claims process is essential at that stage. Please do not hesitate to contact Allen Matkins with any questions you may have regarding RWI structuring, claims management, or post-closing disputes.