R&W insurance, explained simply
The buyer claims against the insurer rather than the seller, which lets the seller exit with less money held back. Key terms are the limit, the retention (comparable to a deductible), the premium, the exclusions and the policy period.
Insurers underwrite on the buyer’s diligence reports. Known issues, forward-looking statements and price adjustments are excluded, and thin diligence means higher premiums, more exclusions or no policy.
What the policy typically covers
Typical scopeIssues identified in diligence are dealt with through price, specific indemnities or escrow instead.
Worked example
The buyer of Alder Creek obtains R&W insurance. Before issuing the policy the insurer reviews the buyer’s QoE, tax and legal diligence reports. Because diligence already identified the sales tax and worker classification issues, the insurer excludes them. The buyer covers those through specific indemnities and escrow.
Alder Creek Manufacturing, Inc. is a fictional company. All figures are illustrative.
Why it matters in a deal
Insurers rely on the quality of the buyer’s diligence, so thorough work can lower cost and widen cover.
Red flags
- Weak or limited diligence reports
- Many deal-specific exclusions
- A buyer assuming the policy covers known issues