Representations and warranties insurance (RWI) has become a fixture in today’s M&A landscape, offering buyers and sellers a mechanism to shift risk and streamline negotiations. Yet, as the RWI market matures, certain recurring disputes highlight the friction between deal economics, coverage intent, and post-closing realities. One common dispute arises when a pre-closing breach continues after the Closing date, raising the thorny question: when does loss stem from a covered pre-closing breach, and when is it attributable to post-closing conduct that falls outside the policy?
The Problem: Persistent Breaches Across the Closing Line
In practice, these disputes often surface where a target’s pre-closing operations involve hidden issues that only come to light months later. Common examples include undisclosed regulatory violations, flawed accounting practices, or non-compliance with key contractual obligations. New management may uncover these problems and take corrective action, but losses frequently continue to accrue in the interim as a result of the seller’s breach.
Insureds should expect the insurers to counter that while the initial misrepresentation may be covered, RWI policies are not designed to indemnify buyers for losses tied to “future conduct” under their own watch. Under the plain language of most RWI policies, any loss with a causal link to a seller’s breach are covered, unless specifically excluded. Therefore, all loss stemming from an undisclosed pre-Closing breach (e.g., failure to comply with laws or to maintain a GAAP-complaint system of accounting) that continues post-Closing before discovered by the buyer should be covered regardless of the when that loss was incurred. The insured would have the burden to prove that the pre-Closing breach—e.g., unlawful billing practices—continued post-Closing and caused the loss—e.g., third party recoupment claim—but then the burden would shift to the insurer to prove the loss was excluded. Since most policies do not contain an exclusion that specifically excludes such losses, policyholders can make persuasive arguments for coverage for post-Closing losses if they can show the continuing harm is the consequence of a pre-Closing breach rather than a separate, post-Closing event.
Common Coverage Defenses
Several defenses often recur in these disputes:
- “No Claims for Future Conduct”: The RWI policy will have provisions that bar coverage for losses tied to the buyer’s post-Closing actions or omissions; insurers will argue that these provisions mean that continuing losses fall on the buyer once the insured assumes control. Insurers routinely argue that RWI policies do not cover loss attributable to the buyer’s post-Closing actions or omissions, and they often rely on several standard policy provisions to support that position. Many policies define “Loss” to exclude amounts arising from post-Closing conduct by the buyer—including incremental damages caused by changes in the buyer’s operations, failure to mitigate, or delays in remediating an inherited problem. Policies also commonly carve out future costs to bring the business into compliance, post-Closing remediation expenses, and other forward-looking operational costs, which carriers recast as evidence that continuing loss is really a function of buyer-side decision-making. In addition, RWI insurers may cite conduct-based exclusions (such as exclusions for violations of law occurring after Closing or intentional acts by the buyer) and the requirement that a Breach must exist as of Signing or Closing to argue that loss accruing after the buyer takes control reflects a new, post-Closing breach rather than a covered continuation of pre-Closing conditions. Policyholders can counter these defenses by demonstrating that the ongoing harm flows directly from a pre-Closing breach that persisted unchanged across the Closing line—not from new conduct or decisions by the buyer.
- Knowledge Qualifiers: If the buyer’s diligence team flagged risks but did not fully quantify or remediate them, insurers may contend that the buyer had knowledge sufficient to limit or preclude coverage. Insurers often argue that coverage is limited because the buyer “knew or should have known” about the issue during diligence, relying on diligence notes, consultant memos, or references to potential risks in the data room. But most RWI policies require actual knowledge of an actual Breach—not mere suspicion or identification of an unconfirmed red flag. Policyholders should emphasize that awareness of a risk is not the same as knowledge of a misrepresentation, and that many policies limit whose knowledge counts, often to a narrow “Deal Team.” Where diligence flagged questions but did not reveal the underlying problem—such as not uncovering systemic unlawful billing, flawed controls, or regulatory violations—insurers cannot use partial diligence findings to impute knowledge. Framing the issue around the distinction between “risk awareness” and “knowledge of Breach” is often key to fighting these defenses.
- Loss Causation Arguments: Carriers often attempt to bifurcate the loss period—covering only damages incurred prior to discovery of the issue, while excluding any loss accruing afterward. Policyholders can mitigate causation fights by building a clear factual record that ties all components of the claimed loss back to the same underlying pre-Closing breach. In practice, this means documenting when the issue was first discovered, showing that the harmful condition continued unchanged after Closing, and demonstrating that the buyer’s post-Closing actions merely uncovered—not caused—the damage. Expert analysis might also be useful in some cases. If the loss impact does not materially change after-Closing due to the pre-Closing breach, the policyholder will have compelling arguments that the post-Closing losses are attributable to same pre-Closing issues. Finally, policyholders should resist attempts to impose artificial “cutoff dates,” and instead anchor the claim to the principle that RWI policies cover all Loss proximately flowing from a covered Breach, regardless of when the economic impact is felt.
Drafting and Diligence Considerations
These disputes highlight the importance of both transaction structuring and policy drafting. Transaction parties and their counsel can take steps to minimize ambiguity and protect against coverage fights:
- Policy Negotiation: Carefully scrutinize exclusions tied to “future conduct,” which can take several forms in RWI policies. Some policies exclude Loss arising from post-Closing violations of law, new regulatory non-compliance, or post-Closing breaches of contracts that occur under the buyer’s watch. Others bar coverage for future operational or accounting decisions, such as changes in accounting methodologies, modifications to internal controls, or shifts in business practices implemented after Closing. Carriers may also propose exclusions for post-Closing remediation costs, forward-looking compliance expenditures, or other amounts incurred to bring the business into conformity with laws or standards going forward. Finally, some underwriters include exclusions for losses caused by the buyer’s failure to implement reasonable mitigation or corrective actions after Closing, which they later frame as “future conduct” defenses. Each of these provisions can become a foothold for insurers seeking to characterize continuing harm as buyer-side conduct rather than a covered consequence of a pre-Closing breach.
- Drafting Solutions: Buyers can also reduce future disputes by incorporating drafting provisions that expressly preserve coverage for ongoing harm caused by pre-Closing breaches. For example, parties can negotiate language confirming that Loss includes amounts incurred after Closing so long as they arise from pre-Closing facts, conditions, or circumstances—even if discovered or quantified later. In deals with identified risks, buyers may consider endorsements clarifying that latent or systemic issues (such as regulatory violations, accounting errors, or improper billing practices) remain covered until fully remediated. Some policies can also be tailored to state that continuing damages will be treated as arising from the same breach unless caused by affirmative post-Closing misconduct. These types of provisions narrow the bases on which insurers can recast ongoing harm as excluded “future conduct.”
- Enhanced Diligence: Targeted diligence can significantly reduce the risk of post-Closing disputes by identifying systemic issues that may persist beyond Closing. Buyers should tailor accounting, regulatory, and operational workstreams to test for patterns—such as recurring billing irregularities, chronic compliance lapses, or embedded control failures—that may not be obvious from high-level reviews. When red flags surface, deeper sampling, supplemental document requests, or targeted management interviews can help distinguish isolated issues from broader, latent problems. Where diligence reveals unresolved concerns, buyers can seek special indemnities, purchase-price adjustments, or policy endorsements that specifically address the identified risks and minimize later fights about whether a continuing problem stems from pre-Closing conditions or post-Closing conduct.
- Claims Preservation: Buyers should document discovery of the issue, its connection to pre-Closing operations, and the causal link between the misrepresentation and resulting losses. Prompt notice—after an internal investigation—and thorough documentation can make the difference in contested claims. When a buyer discovers an issue that may involve persistent harm, it is critical to build contemporaneous, defensible documentation. First, preserve emails, diligence records, and operational data showing that the condition was baked into the target’s pre-Closing operations. Second, maintain a clear chronology of internal discovery, corrective steps, regulatory interactions, and financial impact. Third, separate “remediation costs” (which may be excluded) from “losses caused by the breach” (which are covered)—a distinction that often becomes a flashpoint. Finally, conduct an analysis of the estimated Loss involved; the methodology for Loss calculation is a frequent area of contention and it will serve the insured well to have an idea of its Loss, to the extent possible, even when submitting the claim notice. A well-organized claim file that follows these principles materially strengthens the insured’s position in negotiations or arbitration.
Market and Claims Trends
As the RWI market matures, both insurers and insureds are adjusting their strategies. Underwriters are increasingly sensitive to risks that could give rise to lingering breaches and may require expanded diligence or specific exclusions. On the claims side, insurers are testing defenses in arbitration and litigation, while policyholders push for broader readings that capture the economic reality of a continuing breach.
Insurers are also deploying forensic accountants, claim consultants, and ‘root cause’ review teams earlier and more aggressively in the lifecycle of a claim. These consultants often focus on identifying inflection points after Closing—such as new management decisions, operational changes, remediation delays, or regulatory interactions—that insurers later cite as evidence of buyer-side causation. Policyholders should anticipate these tactics and be prepared with their own expert analyses that tie the entire loss arc back to the same underlying pre-Closing breach, minimizing opportunities for insurers to recharacterize ongoing harm as post-Closing conduct.
Resolution strategies are also evolving. Many claims settle through pragmatic negotiations that allocate loss between covered pre-Closing harm and uncovered post-Closing conduct, reflecting a commercial compromise more than a strict legal outcome.
Conclusion
The “breach that won’t die” presents one of the most vexing challenges in RWI coverage. While insurers and insureds continue to clash over where pre-Closing breaches end and post-Closing responsibility begins, careful drafting, rigorous diligence, and strategic claims handling can mitigate the risk of prolonged disputes. As case law develops and market practices evolve, McGuireWoods’ insurance recovery team can help insureds navigate this persistent gray area.