Anticipating and Removing Common RWI Exclusions

Representations and warranties insurance (RWI) can protect a buyer against covered breaches, but it is not intended to insure every business risk or diligence gap.

Representations not covered by RWI include:

• Known issues
• Forward-looking representations (e.g., revenue pipeline)
• Standard exclusions (e.g., net operating losses)
• Un- or under-diligent representations
• Deal-specific exclusions

The insurer’s response to the above risks will be to (i) require that the disclosure schedules be modified to reflect a known issue, (ii) provide for a “deemed modification” to the purchase agreement to carve back on forward-looking representations, or (iii) provide for exclusions in the RWI policy.

For the above risks, the coverage alternatives are (i) specific indemnity, (ii) escrow, (iii) purchase price reduction or (iv) buyer self-insurance.

Exclusions

Exclusions are shaped by the policy form, the transaction, the diligence record, and the insurer’s view of what can be priced and verified. The most effective way to narrow exclusions is to identify likely concerns early and address them with focused evidence—rather than waiting until the final underwriting call.

Standard exclusions versus deal-specific exclusions

Some exclusions are common across policies or require specialized treatment. Examples can include purchase-price adjustments, known issues, forward-looking statements, certain tax attributes, underfunded benefit obligations, sanctions or excluded jurisdictions, and matters addressed by other insurance. Their treatment varies by insurer and policy form, so they should not be described as universal.

Deal-specific exclusions arise when diligence leaves a material question unresolved or reveals a risk that the insurer cannot comfortably underwrite. Triggers may include weak maintenance records, customer or supplier concentration, regulatory uncertainty, foreign operations, environmental concerns, cybersecurity issues, or inconsistent financial and operational data.

An exclusion is not necessarily a finding that the business has a loss. It means the insurer is limiting coverage for a category or issue. The practical objective is to understand the exact scope, determine whether it can be narrowed, and consciously allocate the residual risk.

Build an exclusion risk matrix before marketing

Start with the business model and the representations that matter most. Map risks by operational assets, regulated activities, people and benefits, information security, tax, intellectual property, contracts, customers, environmental matters, and international operations.

Use the matrix to identify diligence gaps before approaching insurers. For example, for an asset-heavy business, that may mean maintenance histories, capex records, condition surveys, and repair invoices. For a regulated business, it may mean permits, inspection reports, compliance reviews, and correspondence with regulators.

Share the risk matrix and the planned diligence with the broker.  For material items, consider sharing the matrix results with the underwriter. Early transparency can improve the quality of the underwriting discussion and reduce late surprises.

Use targeted diligence to narrow the scope

A third-party engineering report, environmental assessment, benefits analysis, regulatory review, or cybersecurity assessment can address a defined concern more effectively than a general statement that the business is well managed.  When engaging diligence providers, make sure they understand the goals of the diligence process, to address historical process and identify material risks for the target (versus, e.g., what actions could be taken in the future to mitigate process defects).

The report should identify the assets, time period, population, contracts, or jurisdictions covered. Underwriters need to understand whether the work supports the entire representation or only a narrower carve-back.

Where an exclusion is necessary, seek language limited to the known item, named contract, specified jurisdiction, or defined class of loss rather than a broad exclusion that encompasses the representation.

Conditional exclusions and removal mechanics

A conditional exclusion may allow the policy to bind while a defined diligence item remains outstanding, but removal is not automatic. The policy or underwriting agreement should make clear what evidence is required, who must provide it, when it must be delivered, and whether the insurer has discretion to accept it.

Set practical milestones—often 30, 45, 60, or 90 days, depending on the remediation required. Avoid promising a short window for diligence that requires site access, laboratory testing, management interviews, or regulatory responses.  The parties should consider including language in the purchase agreement defining who retains the risk and whether a separate indemnity or escrow will be triggered if the exclusion cannot be removed.

Negotiating the residual risk

Underwriters may respond to better evidence by narrowing an exclusion, adding a sublimit, applying a retention, or offering a carve-back for a defined situation. Buyer diligence, seller cooperation, advisor credibility, and a clear loss model will all help an insurer to accept a narrowing of an exclusion. Where coverage remains partially unavailable, the purchase agreement should expressly allocate the residual risk rather than leave it ambiguous.

Practical checklist

1. Map likely exclusions before requesting indications.
2. Prioritize diligence that addresses the representations most important to value and loss severity.
3. Provide complete reports and source documents, not just executive summaries.
4. Ask underwriters to explain the factual basis and scope of each exclusion.
5. Define the evidence, deadline, and decision process for conditional removal.
6. Coordinate exclusions with disclosure schedules, indemnities, escrows, and other insurance.

Final thoughts

RWI exclusions are a common outcome of the underwriting process, but can be avoided or narrowed by early risk mapping and targeted diligence.  Deal drafting should be as responsive as possible to any residual risks identified during underwriting.

Next step: One of our M&A insurance team members can help map likely exclusion triggers, design focused diligence, prepare the underwriting narrative, and negotiate language that reflects the diligence conclusions.