JSVHQIn founder-led exits, warranty and indemnity insurance has become the quiet compromise: the seller wants a clean break, the buyer wants protection, and the policy sits in the middle. The problem starts when diligence turns up a real issue and someone says, “the insurance will cover it.” In most cases it will not.
How the knowledge exclusion works
- W&I policies cover unknown breaches of the warranties given in the SPA.
- They typically exclude matters the buyer’s deal team actually knew about before signing, and matters fairly disclosed in the data room or disclosure letter.
- The deal team is usually a named list. What sits in their emails, call notes, and DD reports counts.
Other common carve-outs buyers forget
- Forward-looking statements and forecasts.
- Purchase-price adjustment mechanics (working-capital true-ups, earnouts).
- Issues the underwriter flags as heightened risk after reading the DD reports — often tax structuring, sanctions exposure, or pension items, depending on the deal.
- Areas where diligence was thin or not done at all; underwriters price and exclude what was not examined.
What to do with a known issue instead
- Price it: adjust headline value or move it into a completion-accounts mechanism.
- Ring-fence it: a specific indemnity from the seller, backed by escrow or holdback.
- Fix it pre-signing: a condition precedent or a pre-completion remedy.
- Walk away when the issue goes to the core of why you are buying.
Questions to ask before you rely on the policy
- Which of our DD findings are now excluded because we know about them?
- What did the underwriter carve out after reading our reports, and why?
- Who is on the deal-team knowledge list, and what have they written down?
- Is the retention level realistic for the size of the risks we actually face?
Related reading: earnout and working-capital true-ups, side letters and cap tables, related-party revenue in founder-led deals, and financial DD misses.
Closing
Insurance is for the problem nobody saw. The problem you found in diligence needs a price, an indemnity, or a fix. If you are weighing cover against a live finding, speak to us under NDA before signing.