The seller signs a stack of representations and warranties at closing. They say the financials are accurate, there are no undisclosed lawsuits, the contracts are valid, the title is clean. Then they wire the proceeds and move on. If any of that turns out to be wrong after closing, you find out when it already costs money to fix.
Reps and warranties insurance exists to address that gap. Here is what ETA operators need to know before they need it.
What reps and warranties insurance actually covers
A reps and warranties insurance policy insures the representations and warranties in the purchase agreement against breach. If the seller made a statement that turned out to be false or inaccurate, and that inaccuracy causes a loss, the policy pays the claim.
Common breaches that trigger claims: financial statement misrepresentations, undisclosed tax liabilities, unscheduled litigation, intellectual property ownership issues, and undisclosed environmental obligations. The insurer steps in rather than the buyer having to pursue the seller directly through indemnification litigation.
What it does not cover is equally important. R&W policies exclude known risks disclosed in the data room, purchase price adjustments, forward-looking projections, fraud by the insured buyer, and specific matters identified during due diligence and carved out of the representations. If you knew about a risk and did not address it in the deal, insurance will not retroactively protect you.
How the policy is structured
In more than 90 percent of deals today, the buyer purchases the policy, according to Relay Investments' search fund FAQ. This flips the traditional structure where the seller backed the indemnification obligation. Now the seller can take clean proceeds at closing. The buyer has a direct claim against the insurer rather than chasing a seller who has already distributed their money.
The key cost components:
- Premium: Typically 2.5 to 3.5 percent of the coverage limit. On a $10M deal with $5M of coverage, that is $125,000 to $175,000 in premium.
- Underwriting fee: Usually $25,000 to $50,000, charged to review the deal documentation and diligence materials before binding.
- Retention (deductible): Typically 1 percent of deal value, sometimes as low as 0.5 percent of total enterprise value. This is the loss threshold the buyer absorbs before the policy pays.
- Minimum premiums: Most policies have minimums of $100,000 to $150,000 regardless of deal size, per Ice Miller's market trends analysis.
Policy duration varies by rep type. General reps and warranties typically carry a 3-year coverage period. Fundamental reps — title, authority, capitalization — typically carry 6 years, matching the statute of limitations for core ownership claims.
When it makes sense for ETA deals
R&W insurance originated in large-cap PE transactions. It has moved steadily down-market. Today it appears regularly in deals above $15M to $20M. Below that threshold, the minimum premium creates an economics problem: $100,000 in premium on a $5M deal is 2 percent of deal value before you have addressed any actual risk. The math usually does not work.
For ETA operators using SBA 7(a) financing, R&W insurance is possible but uncommon at the lower end of the deal size range. Lenders are increasingly familiar with it, and it can be financed as part of the acquisition cost in some structures. If your deal is above $15M and you have institutional investors in your LP structure, expect your investors to ask about it.
The case for R&W insurance sharpens when: the seller is an individual owner who will spend the proceeds, the business has complex financial reporting, the industry carries elevated regulatory or environmental exposure, or competitive deal dynamics are making indemnification escrow difficult to negotiate.
The case against it sharpens when: the deal is under $10M, your diligence is thorough and focused, the seller is a sophisticated institutional counterparty with indemnification staying power, or the premium cost materially compresses your returns on the deal model.
How it interacts with indemnification escrow
In a traditional deal without R&W insurance, the buyer negotiates an indemnification escrow. The seller holds back a portion of proceeds, typically 10 to 15 percent of deal value, for 12 to 24 months to cover any post-closing claims. That holdback is friction. Sellers dislike it. It slows negotiations and creates disputes when the seller believes the holdback should release and the buyer disagrees.
R&W insurance largely replaces that dynamic. With a policy in place, the seller can take full proceeds at closing. The escrow shrinks or disappears entirely. Negotiations move faster. The seller's attorney spends less time fighting indemnification carve-outs. For competitive situations where speed matters, that is a real structural advantage.
The underwriting process
Insurers underwrite R&W policies on the strength of your diligence work, not on blind faith in the seller's statements. Before binding, you will deliver your Quality of Earnings report, legal diligence memos, customer and vendor contract reviews, and any specialist reports. The underwriter identifies exclusions based on what you found. Anything disclosed in due diligence, flagged by a specialist, or left in a data room as an open question typically gets excluded from coverage.
This creates a structural incentive: strong diligence equals broader coverage. Operators who shortcut diligence to move faster often discover their policy has more exclusions than expected. The diligence process and the insurance process reinforce each other. For a deeper look at what strong diligence covers, see our overview of the acquisition due diligence checklist.
The operator's read
EOD operators know the difference between a controlled detonation and hoping nothing goes wrong. Reps and warranties insurance is not about hoping. It is about designing the deal so that a breach in the seller's representations does not detonate on your balance sheet after closing.
At deal sizes where the math works, R&W insurance is increasingly standard. It aligns incentives: the seller gets clean proceeds, the buyer gets a solvent counterparty for claims, and the indemnification negotiation simplifies. The escrow fight goes away.
At deal sizes where the math does not work, do not force it. Spend that premium on better diligence instead. Know the threshold before you start the conversation. Underwriting fees are not refundable if you decide the coverage is not worth binding.
The representations your seller signs are worth exactly as much as your plan to enforce them. Build that plan before closing, not after.
Frequently Asked Questions
What does reps and warranties insurance cost for a search fund acquisition?
Premiums typically run 2.5 to 3.5 percent of the coverage limit, plus a non-refundable underwriting fee of $25,000 to $50,000. Minimum premiums are commonly $100,000 to $150,000. On a $15M deal with $5M of coverage, total policy cost can reach $175,000 to $225,000 before the retention.
Who buys reps and warranties insurance, the buyer or the seller?
Buyers purchase more than 90 percent of R&W policies today. Buyer-side policies allow the seller to take clean proceeds at closing without keeping an indemnification obligation outstanding. The buyer files claims directly with the insurer rather than pursuing the seller post-closing.
What deal size makes reps and warranties insurance practical for ETA operators?
R&W insurance becomes economically practical on deals generally above $15M to $20M, where the premium cost is a proportionate fraction of deal value. Below $10M, minimum premium requirements can make the policy cost 2 percent or more of deal value before addressing any risk. SBA-financed deals under $5M to $10M rarely include it.
What does reps and warranties insurance not cover?
R&W policies exclude known risks disclosed during due diligence, forward-looking projections, purchase price adjustments, specific matters carved out by the underwriter after reviewing diligence materials, and fraud by the insured buyer. Coverage is built on what the seller represented as true, not on issues already identified and priced into the deal.
