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The importance of being earnest about subrogation rights

By Simone Bonnet | September 1, 2023

Representations and warranties insurance has become an essential tool in modern dealmaking.
Mergers and Acquisitions


Representations and warranties insurance (“RWI”) has become an essential tool in modern dealmaking. A RWI policy is most commonly put in place to protect the buyer in an acquisition against any breaches of the representations and warranties in the purchase agreement by the target company and/or the seller.

Unlike in other lines of insurance, where policy documents are often boilerplate forms, RWI policies are bespoke contracts, and they are, in a sense, living documents. As the transactional insurance industry has matured, all the (more than twenty-five) insurance carriers in the market have developed baseline coverage forms, the terms of which are then further negotiated between the insurer on the one hand and the insured, the insured’s law firm, and the insurance broker on the other. Even when an insurer has a so-called “precedent” form with a law firm, a returning client, and/or a broker, that precedent form tends to be further negotiated on a deal-to-deal basis, or periodically revisited and updated to match the latest market coverage terms. Definitions are tweaked and expanded, and language is adjusted to account for the particularities of a specific deal or simply the current M&A market.

Most RWI insurers are comfortable with the back-and-forth, give-and-take nature of policy negotiations, and almost all policy language is to some extent negotiable to better match the provisions of the purchase agreement that governs the transaction being insured. That is because the RWI policy ties into the purchase agreement and disclosure schedules that effectuate the underlying transaction, and its relevant terms (for example, definitions and references to deal mechanics such as the purchase price adjustment) must tie into those deal documents. The RWI policy is developed in tandem with the purchase agreement and schedules.

However, even as policy forms continue to evolve over time, there are some provisions of the policy and of the underlying purchase agreement that, to insurers, embody their inalienable rights. Most importantly, RWI insurers require that the purchase agreement and the policy protect and enshrine the insurer’s right of subrogation against the seller in the instance in which the seller commits fraud. This right is the lynchpin that allows RWI carriers to provide coverage for claims arising from seller fraud under the policy, which is one of the most valuable aspects of the coverage. And, critically, that right must be protected in the purchase agreement in order for it to be available to the insurer under the policy.

What is subrogation?

“Subrogation,” simply put, means “the substitution of one for another.” In the legal context, subrogation involves the assumption by a third party of another party’s legal right to collect a debt or damages. It is a right commonly contractually established in insurance policies across different lines of insurance, including in RWI. The right of subrogation allows the carrier, having paid a loss to its insured under the policy, to “step into the shoes” of that insured and pursue recovery from the party that caused the loss.

Every RWI policy form contains standard language protecting the Insurer’s subrogation rights in case of Loss payment. The policies typically provide in broad fashion that: “In the event of any payment of Loss under this policy, the insurer shall be subrogated to the extent of such payment to, and the insureds shall assign to the insurer, all of the insureds’ rights of recovery with respect to such loss.” Thus, if the insurer indemnifies the Insured for a loss under the policy, the insurer is entitled, pursuant to its right of subrogation, to recoup those payments directly from the party that wronged the Insured and caused the loss.

There are, however, equally standard carve-backs to the insurer’s subrogation rights in RWI. For example, the insurer is not permitted to subrogate against the Insured itself (including any of its affiliates), against the acquired business, or against shareholders, members, officers, employees, partners, or attorneys of the acquired business who were associated with the business prior to Closing. There are also limitations on an insurer’s right of subrogation against customers, clients, or suppliers of the insured or the acquired business. The policy therefore limits how far-reaching the Insurer can be in its quest for reimbursement and protects the insured from potential damage to its business or relationships that could be caused by an insurer’s efforts to pursue a recovery. However, in general, the Insurer retains broad rights to pursue actors who have caused losses under the policy.

The most critical carve-back to the insurer’s otherwise wide-ranging subrogation rights, however, respects the seller of the target being acquired. A key term of the policy is the insurer’s waiver of any right of subrogation, claim in contribution, or right of assignment against the seller (including, where relevant, the seller’s parent entities, shareholders, members, partners, directors, officers, managers, etc.), except in case of fraud by the seller. Thus, even if the insurer pays a loss that results from a breach of the representations and warranties in the purchase agreement that are given by the sellers or the company, the insurer cannot pursue the seller to recoup its loss payment unless the breach and loss in question resulted from seller fraud.

What is fraud? A critical question

A buyer’s scope of possible recovery against a seller for breaches of the representations and warranties in a purchase agreement is often the subject of intense negotiations. The parties may agree that sellers will provide an escrow account or other form of holdback against which the buyer can recover if there is a breach and a related loss. Sometimes the holdback functions alongside a RWI policy (typically, the holdback will function as part of the underlying retention, or deductible, that must be eroded before buyer is able to recover under the RWI policy). However, with increasing frequency, parties are agreeing to “walkaway” deal constructs, in which the seller provides no indemnity and the buyer’s sole recourse in case of breaches of representations and warranties is pursuant to an RWI policy.

Critically, even in no-recourse deals, buyers typically reserve their right to pursue sellers if and when a breach of the representations and warranties results from seller fraud. That protection – the so-called “fraud carveout” – is particularly important to the RWI insurers, which rely on those carveouts to maintain their extremely limited subrogation rights against the sellers. Because the insurer is not party to the purchase agreement and the seller is not party to the insurance contract, the insurer and the seller are not in privity with one another and do not, absent some action as between the buyer and seller, have any rights or recourse against one another.[1] Thus, it is critical that buyers retain a right of recovery against sellers in the case of seller fraud, in order to allow the insurers a contractual avenue to step into the buyer’s shoes if there is a fraud that causes a loss payment. If the purchase agreement lacks the appropriate carveouts, RWI carriers will refuse to provide coverage for fraud, dealing a blow to one of the more valuable aspects of the coverage.[2]

It is not just the fraud carveout that RWI underwriters focus on, however: the very definition of “fraud” in the purchase agreement is also a hot-button issue for insurers. That is because, if the fraud definition is particularly limiting, it will (in the insurers’ view) render the subrogation rights effectively unenforceable.

Most often, fraud definitions in a purchase agreement where RWI is being placed will follow Delaware common law or have wording that roughly follows Delaware’s definition. Acceptable definitions typically limit fraud to “actual, intentional, and knowing common law fraud” (excluding constructive fraud, equitable fraud, or negligence or recklessness), and RWI policies will accept and follow this type of definition without issue.[3] However, where the definition of fraud limits it to instances in which the commission of fraud is as “determined by a court of competent jurisdiction” or similar language that ties the existence of fraud to a legal finding of the fraud by an arbiter, underwriters will push back. In the insurers’ view, given the heightened pleading standard required in fraud claims and the remoteness of the possibility that a fraud action will make its way through an entire legal process to an outcome in which an arbiter makes an affirmative, final determination that sellers committed fraud, such a definition moots any possibility that they may be able to pursue the sellers. As such, again, if the fraud definition is limited in this fashion, RWI underwriters will refuse to provide fraud coverage.

In summary, RWI insurers require that their subrogation rights against insurers in case of fraud by preserved by virtue of a “market standard” fraud definition (which typically follows Delaware law) and appropriate fraud carveouts to the purchase agreements even where buyers preserve no other recourse against sellers. These rights are non-negotiable to insurers, as they preserve the insurers’ narrow rights of recovery against bad-acting sellers. In order to achieve the broadest-possible coverage under an RWI policy, counsel should ensure that buyer’s rights – and, therefore, insurers’ rights – are protected.


  1. There is a minor exception to this rule whereby, in many instances, Sellers will be explicit third-party beneficiaries of the RWI policy provision in which the Insurer waives its rights against Sellers other than in respect of fraud. However, Sellers’ ability to enforce the Policy provisions is limited exclusively to that particular section of the Policy, and Sellers otherwise have no rights under a RWI policy that covers the Buyer as Insured. Return to article
  2. There is some nuance surrounding the necessity of fraud carveouts in deals governed by Delaware law following the Delaware Court of Chancery decisions in Abry Partners V, L.P. v. F&W Acquisition LLC, 891 A.2d 1032 (Del. Ch. 2006) and its progeny, which generally hold that a seller and tis affiliates cannot insulate themselves from properly pled fraud claims based on false representations and warranties in the purchase agreement. Thus, arguably Buyers maintain a right against Sellers for fraud under Delaware purchase agreements even absent explicit fraud carveouts. However, to avoid legal wrangling on this point and allow for contractual clarity, most RWI underwriters will insist on fraud carveouts even when the purchase agreements they are covering are governed by Delaware law. Return to article
  3. TIn addition, where a purchase agreement makes reference to fraud and includes fraud carveouts but does not, in fact, define the term “Fraud,” RWI policies will typically include a definition that follows Delaware common law. Return to article


Willis Towers Watson hopes you found the general information provided in this publication informative and helpful. The information contained herein is not intended to constitute legal or other professional advice and should not be relied upon in lieu of consultation with your own legal advisors. In the event you would like more information regarding your insurance coverage, please do not hesitate to reach out to us. In North America, Willis Towers Watson offers insurance products through licensed entities, including Willis Towers Watson Northeast, Inc. (in the United States) and Willis Canada Inc. (in Canada).


Senior Director, Transaction Risk Advisory & Solutions

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