VC & PE Glossary
What Is Warranty and Indemnity Insurance?
Updated
Definition
Warranty and indemnity insurance — the same product as W&I insurance — protects buyers and sellers in M&A when representations in the purchase agreement prove false, reducing escrow and personal indemnity exposure.
Useful for: Founders, Investors
Warranty and indemnity insurance is the full name for W&I insurance — coverage for breaches of seller warranties and indemnities in acquisitions and large recapitalizations.
How it works
Purchase agreements contain extensive reps and warranties — financial accuracy, legal compliance, absence of undisclosed liabilities. Buyers demand indemnification; sellers negotiate caps, baskets, and survival periods.
W&I policies transfer claim risk to insurers after retention:
- Underwriters review disclosure schedules and management presentations
- Policies specify limit, retention, exclusions (known issues, fraud, purchase price adjustments)
- Claims process resembles other commercial insurance — notice, investigation, payment
Buy-side policies protect buyers from seller collectability; sell-side policies may also cover sellers’ defense costs. Premium economics improve with repeat sponsor relationships and clean diligence.
Venture-backed exits use W&I more as deal size and sponsor involvement grow — less common in small acqui-hires, routine in PE platform roll-ups.
Why it matters
- Founders: Negotiate who pays premium and whether escrows drop proportionally. Bad disclosures kill insurability or spike premium.
- Investors: Faster closes with fewer post-close fights over indemnity escrows — if policy limits match realistic breach scenarios.
Common mistake
Assuming insurance covers all reps without reading exclusions. Tax, environmental, and specifically disclosed issues often sit outside coverage.
Related ideas
See also W&I insurance, escrow, and purchase agreement indemnities.
Related terms
- Escrow — Escrow holds a portion of deal proceeds with a third party until conditions are met—covering indemnity claims, earn-outs, or post-close adjustments in M&A and some financings.
- W&I Insurance — W&I insurance — warranty and indemnity insurance — covers breaches of seller representations in M&A, replacing or supplementing escrow holdbacks and personal liability for deal parties.
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Common questions
Short answers for founders, LPs, and operators