How the Structure Works

Most policies today are buy side policies. The buyer is the named insured and claims directly against the insurer for breaches of the seller\'s representations in the purchase agreement. Sell side policies exist and respond to the seller\'s indemnity obligation, but buy side is the dominant form because it gives the buyer a direct remedy.\n\nThe economics have a recognizable shape. There is a policy limit, commonly set as a percentage of enterprise value. There is a retention, functioning like a deductible, often also expressed as a percentage of enterprise value, which frequently drops to a lower level after a period. There is a premium expressed as a rate on line, meaning a percentage of the limit purchased. And there are underwriting fees and, in most jurisdictions, surplus lines taxes.\n\nThe purchase agreement is usually modified to match. The seller\'s indemnity may be eliminated or reduced to a small escrow that covers the retention, and the survival periods for representations are set to align with the policy. Getting that alignment right is the single most important mechanical task, because a mismatch between the agreement and the policy can leave a loss uncovered by either.

• Buy side policies make the buyer the insured with a direct claim against the insurer
• Limits and retentions are typically set as a percentage of enterprise value
• Premium is quoted as a rate on line, plus underwriting fee and applicable taxes
• The purchase agreement must be aligned with the policy, including survival periods and definitions
• Policy periods commonly extend well beyond the agreement\'s own survival periods

What It Does Not Cover

This is the part that deserves the most attention, because the exclusions are consistent across the market and they are not negotiable in most cases.\n\nKnown issues are excluded. Anything disclosed in the data room, identified in diligence, flagged in a quality of earnings report, or listed on a disclosure schedule is outside the policy. Insurers review the diligence reports, and anything the team found is treated as known. That is the core principle: the policy covers unknown breaches, not identified problems.\n\nPurchase price adjustments, working capital true ups, and net debt calculations are excluded, because those are commercial allocation mechanisms rather than representation breaches.\n\nForward looking statements and projections are excluded. A business that misses its plan has not breached a representation.\n\nCertain categories are commonly excluded or limited by default and sometimes bought back with additional diligence: asbestos and environmental in some industries, pension underfunding, wage and hour exposures in labor intensive businesses, medical billing and reimbursement in healthcare, transfer pricing, and in some markets cyber and data privacy.

• Known and disclosed matters are excluded; the policy insures unknown breaches
• Purchase price adjustments and working capital disputes are excluded
• Projections and forward looking statements are excluded
• Industry specific categories such as wage and hour, pension underfunding, and healthcare billing are often excluded or conditioned
• Seller fraud is generally covered, with the insurer retaining subrogation against the seller

Why Diligence Quality Determines the Outcome

The most counterintuitive feature of this product is that thin diligence does not transfer more risk to the insurer. It transfers less.\n\nUnderwriters read the buyer\'s diligence reports, including legal, financial, tax, and often insurance and benefits. They hold an underwriting call with the deal team and ask how each major representation was tested. If a representation was not diligenced at all, the insurer may exclude it, because the policy is not designed to insure questions nobody asked.\n\nThat creates a clear practical rule: scope diligence to the representations you intend to insure. If the purchase agreement contains a representation about compliance with wage and hour law, and nobody reviewed payroll practices, expect that representation to be excluded or heavily limited.

• Underwriters review diligence reports and exclude representations that were not tested
• Scope diligence deliberately against the representations you want insured
• Expect an underwriting call where the deal team explains how each area was diligenced
• Quality and organization of diligence materially affect both coverage breadth and price

Talk Through a Transaction

If you have a deal in diligence, the insurance workstream should start when the purchase agreement is first drafted rather than in the final week. We work with sponsors and management teams on transactional risk, portfolio placements, and post closing integration. Schedule a conversation at calendly.com/grandbayfinancial.\n\nThis article is for general information and is not a substitute for policy language or professional advice.