DealLawyers.com Blog

Traditionally, sellers in private deals are responsible for losses that result from a proven breach of the reps & warranties contained in the purchase agreement. This Pillsbury blog says that aggressive buyers are now seeking to negotiate language in those agreements to cover defense costs incurred for post-closing claims involving mere allegations that a rep has been breached.

This isn’t typically a huge issue in deals with RWI, since that insurance typically provides for the insurer to bear the buyer’s defense costs. However, as this excerpt explains, it’s a much bigger issues in the significant minority of private deals where reps & warranties aren’t backed by insurance:

But not every deal has R&W insurance. In many founder-led, strategic-buyer or smaller private company transactions, R&W insurance is not utilized. In those deals, some buyers are trying to recreate the same protection they would have received from an insurer, but at the seller’s expense and without paying for the insurance. According to the 2025 ABA Deal Points Study, provisions requiring sellers to cover claims alleging a breach of a R&W increased from 17% of deals in 2022–2023 to 27% of deals in 2024–2025.

In a non-insured deal, the economics are very different. If the purchase agreement requires the seller to cover defense costs based only on allegations, the seller may have to write checks before any breach has been established. That can reduce the value of the deal, erode escrowed funds, and force former owners to spend proceeds defending a business they no longer control.

Buyers may argue that, if the claim relates to pre-closing conduct, the seller is closer to the facts and should bear the risk. Claims are typically not fully meritless, and the seller’s past action or inaction led to the claim in some way. Sellers should be careful with that framing. Anyone can make allegations, and the parties have already negotiated the R&W framework that defines the seller’s post-closing liability. If defense costs are triggered by allegations alone, the seller’s negotiated risk profile expands unjustly, and the R&W framework is close to meaningless.

The blog says that sellers in non-insured deals should push to limit indemnity obligations to apply only when there’s an actual breach. If a buyer pushes for coverage beyond that, it recommends that the seller narrow its obligations by limiting the types of covered claims, requiring cost sharing for pending claims, ensuring that the seller has the right to control the defense of the claim, applying negotiated caps, baskets and escrows to the defense cost obligations, and requiring a true-up if no breach is found.

– John Jenkins