RWI Enters a Soft Market as Claim Severity Hits Records

Representations and warranties insurance has become one of the quieter but more consequential features of middle-market M&A over the past decade. It shifts most of the seller's post-closing liability for breaches of deal representations to an insurance carrier, allowing sellers to exit with greater certainty and buyers to close without needing extensive escrow holdbacks. Through 2025 and into 2026, the RWI market has entered what brokers describe as a soft phase, with premiums compressed, retention levels dropping, and coverage terms broadening. At the same time, published claims data shows average claim payouts at record highs. For business owners approaching a sale, the two trends together make RWI a more accessible and more useful tool than it was just two years ago.

Where RWI Pricing and Terms Now Sit

Premiums for RWI policies in the North American middle market now frequently price below 3% of the coverage limit, down from the 3.5% to 4.5% range that was common during the 2021 peak and the subsequent capacity-constrained period. For a $10 million policy, the premium difference between 3.0% and 4.0% is $100,000, which is a material number but is routinely absorbed within the deal's transaction cost structure rather than negotiated as a line-item.

Retention levels, the equivalent of an insurance deductible, have similarly compressed. The 1% to 2% of enterprise value range remains the norm, with a growing number of policies offering a step-down retention that drops after 12 to 18 months post-closing. This matters more than the headline premium number in many transactions, because the retention level, not the premium, determines how much of an initial claim the parties absorb before the insurance pays out.

Coverage terms have broadened in parallel. Carriers are more willing to cover certain exclusions that were standard in earlier market conditions, including specific tariff-related representations, particular categories of data privacy and cyber exposure, and the scope of material contract representations. Policies now routinely run for three years on general representations and six years on fundamental representations, with some carriers extending to seven.

The softening reflects substantial carrier capacity: the number of insurers actively writing RWI has grown, competition for desirable deal profiles is intense, and the deal flow has not fully recovered to the peak volume that absorbed that capacity in 2021.

Why Claim Severity Is Rising

Even as pricing has softened, the average claim payout in RWI has climbed to record levels. Published claims data from major brokers shows average resolved claim payments well above historical norms, with some carriers reporting average severity near $7 million per paid claim.

The reasons for the severity trend are worth understanding, because they inform how RWI should be structured on a given transaction. Several drivers are at work. The quality of diligence has improved, which means the claims that do emerge tend to be the ones that could not have been caught in due diligence, and those tend to be larger in magnitude. Financial statement issues, particularly around revenue recognition, continue to represent the largest category of loss, followed by material contracts and compliance with law.

The second driver is the size and complexity of transactions. Larger deals tend to produce larger claims both because the dollar amounts at stake are higher and because the inherent complexity of integrating a large business creates more opportunities for hidden issues to emerge. As the middle-market RWI market has extended upward to larger deal sizes, the average policy limit has grown, and with it the average claim magnitude.

The third driver is the time lag. RWI claims typically emerge 12 to 36 months after closing, so the current elevated severity data partly reflects deals signed in 2022 and 2023, during a period of high integration pressure and meaningful business disruption from the inflationary environment.

How RWI Structuring Decisions Affect Deal Outcomes

The presence of RWI changes several deal mechanics in ways that matter to both sellers and buyers.

The most direct effect is on the escrow or holdback structure. In a traditional deal without RWI, a portion of the purchase price (typically 7% to 10%) is held back in escrow to secure the seller's post-closing indemnification obligations. With RWI in place, that holdback shrinks substantially or disappears, because the buyer is relying on the insurer rather than on seller creditworthiness. For sellers, this means more cash at close and less capital tied up for 12 to 24 months.

The second effect is on the indemnification cap. Without RWI, sellers in middle-market deals typically bear uncapped or near-uncapped liability for breaches of fundamental representations (title, capitalization, authority), and capped liability for general representations. With RWI, the seller's exposure is typically limited to the retention level plus any covered exclusions, with everything above that layer shifted to the insurer.

The third effect is on diligence intensity. Carriers require a level of diligence to underwrite the policy, and what they require has become increasingly structured. Buyers who commission a comprehensive third-party quality of earnings report, a detailed legal diligence report, and specialty diligence in areas like IP, regulatory, and cyber will find RWI underwriting streamlined. Buyers who approach carriers with thin diligence will face either higher premiums, broader exclusions, or carriers declining to quote.

Where RWI Does Not Help

RWI is not a universal solution. Several categories of risk are typically excluded or narrowly covered, and sellers and buyers should understand where the tool stops.

Known issues are excluded. If a specific matter is identified in diligence, RWI will not cover the downside of that specific matter, because the underwriting assumes the buyer priced the risk or addressed it through other mechanisms (specific indemnities, escrows, purchase price adjustments). This is the reason carriers conduct their own diligence review, to confirm that any known issues are handled outside the policy.

Forward-looking representations are not covered. RWI responds to breaches of statements of fact about the business as of signing and closing. It does not cover projections, forecasts, or the failure of the business to achieve post-closing performance targets.

Certain categories routinely carry exclusions that require specific additional underwriting. Tax matters often have limited or excluded coverage, with separate tax insurance policies available for specific positions. Environmental liabilities, employee classification issues, and certain intellectual property infringement claims can fall outside standard coverage. Cybersecurity representations have broadened but still carry carrier-specific limitations.

Forward Look

Several developments bear watching through 2026. Carrier capacity has grown substantially, but the record severity levels in published claims data create pressure on underwriting discipline. If the frequency of large claims continues, the current soft market conditions will not persist indefinitely. Specialty policies covering tariff exposure, cyber, and tax are increasingly available alongside core RWI, and the structural use of multi-policy stacks is becoming more common on larger and more complex transactions.