Why deal size matters
Let's start with the bookends.
Smaller deals — say, around $40 million — often need more than 10%. A $4 million policy may technically follow the rule, but it may not offer meaningful protection. For a modest premium increase, buyers can often secure significantly more coverage, and that extra protection can be critical if a claim arises. In these cases, the marginal cost of additional coverage is often outweighed by the potential benefit.
Larger deals — say, $1 billion or more — tend to trend below 10%. A $100 million policy may be excessive depending on the risk profile. Our benchmarking shows that buyers are already adjusting expectations accordingly. These buyers are more likely to assess the nature of the reps and the likelihood of breaches before deciding on coverage levels.
What claims data tells us about reps and warranties insurance
Our team conducted extensive research on RWI claims to further understand limits. Note that for RWI, each policy is bespoke, and breaches often span multiple reps. Add in geographic differences (US vs. Europe) and a wide range of deal sizes being averaged, and it's clear that claim interpretation is an art, not a science.
Below are some patterns we noticed:
Top breach categories
The top five breach categories are:
- Financial statements
- Compliance with the laws
- Material contracts
- Condition of assets (notably rising)
- Taxes
Financial statement and material contract breaches tend to be the most severe, often tied to EBITDA. A claim tied to EBITDA is more likely to be subject to multiples: "I paid 10 times EBITDA for this company; the breach fundamentally alters my EBITDA, and therefore I require 10 times the value of the breach." While this approach also applies to intellectual property (IP) breaches, they're less frequent and so don't make it into our worst-offenders list.
The severity of these breaches underscores the importance of understanding which reps are most likely to be implicated in a claim.
Deal size and claim severity
Here's where things get interesting.
The frequency of breaches is relatively consistent across deal sizes. However, severity varies. Deals under $150 million see more claims, but those claims tend to come in as a lower percentage of the limit purchased, as they're typically less severe. Deals over $750 million see fewer claims — but those claims often result in higher payouts as a percentage of limits.
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Buyers need to assess which reps are most critical to the transaction and consider how a breach would affect the overall deal economics.
And yes, another prevailing misconception is that bigger deals are "better diligenced" and less likely to result in a claim. The data shows this isn't always the case; a lot of claims coming under financial representations have been made outside due diligence by extremely reputable firms.
Are buyers over-insuring?
Not really. About 15% to 20% of paid claims result in full limits of loss. That number suggests that in some cases, higher limits would have led to higher recovery. This data point is critical — it shows that while some buyers may appear to be over-insuring, they're positioning themselves to recover more in the event of a significant breach.
Beyond the numbers
The real takeaway? Context matters.
Some deals hinge on a few key reps — think IP-heavy transactions or deals driven by a single customer contract. In those cases, higher limits make sense. A breach could materially impact deal value.
Buyers need to assess which reps are most critical to the transaction and consider how a breach would affect the overall deal economics.
Other factors — like company history, buyer/seller familiarity and prior joint ventures — also play a role. We help clients weigh both statistical and situational factors when evaluating limits. For example, a company with a long operating history and stable financials may present less risk than a startup with a limited track record.
The bottom line: Insurance limits
The 10% rule is a useful starting point — but it's by no means a one-size-fits-all solution. The best approach is thoughtful, data-informed and tailored to the specifics of the deal. Buyers should consider deal size, rep concentration, historical claims data and qualitative factors when determining appropriate insurance limits.
Work with a broker who understands the nuances, to get the protection you need without overpaying. A broker who can interpret claims data, understand deal dynamics and provide strategic guidance is an invaluable partner in navigating the complexities of reps and warranties insurance.
Ultimately, the goal is to strike the right balance between cost and coverage. By moving beyond the 10% rule and embracing a more nuanced approach, buyers can ensure they're adequately protected while optimizing their insurance spend.
