The private Mergers and Acquisitions (M&A) market has fundamentally transformed over the last several years. As deal structures become more intricate to accommodate shifting economic realities, the mechanisms designed to manage risk are facing unprecedented stress tests.
For corporate buyers, sellers, and legal counsel, 2026 has brought two distinct litigation trends to the forefront: a surge in Representation and Warranty (R&W) insurance disputes and a dramatic rise in post-closing earn-out conflicts.
Here is a deep dive into why these disputes are rising, what they mean for your transactions, and how sophisticated corporate parties can mitigate their litigation risk.
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The R&W Insurance Crackdown: When 99% Coverage Meets Policy Exclusions
Representation and Warranty (R&W) insurance has transitioned from an innovative risk-shifting tool to an absolute staple of the deal ecosystem. In fact, R&W insurance is now utilized in roughly 99% of private target acquisitions. Historically, these policies served as a seamless bridge, allowing sellers to achieve a clean exit with minimal indemnity escrow while giving buyers recourse for post-closing discoveries of breaches.
However, the honeymoon period is officially over. As the volume of policies written over the last few years matures, 2026 is seeing a substantial uptick in high-stakes litigation, specifically between buyers and insurers.
Why Are R&W Claims Hitting a Wall?
The core of the current litigation wave lies in policy exclusions and the definition of a breach. Insurers, facing a higher volume of claims, are scrutinizing filings with unprecedented rigor. Areas driving the most friction include:
- The "Known Loss" Exclusion: Insurers frequently argue that the buyer’s deal team or core due diligence team had knowledge of the issue prior to signing or closing, invalidating coverage.
- Interim Period Breaches: Disputes over breaches that occurred between the signing of the deal and the closing, particularly in volatile markets.
- Materiality Scrapes: Disagreements over how valuation drops are calculated when a representation is breached, and whether a materiality scrape in the acquisition agreement automatically applies to the insurance policy's deductible and limits.
Navigating these intricate, insurance-backed claims requires an intimate understanding of both insurance policy mechanics and courtroom strategy. When underwriters push back on valid coverage claims, having an experienced dispute resolution team in your corner from day one can make all the difference in forcing a recovery.
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The Return of the Earn-Out: Valuation Gaps Drive Post-Closing Friction
The second major litigation driver in 2026 stems from how deals are being structured at the negotiation table. Lingering valuation gaps between what buyers are willing to pay and what sellers believe their companies are worth have forced a return to sophisticated, phased consideration models.
To bridge these gaps, earn-out structures are back in fashion. While an earn-out—where a portion of the purchase price is contingent on the target business hitting specific future financial or operational milestones—is excellent for getting a deal signed, it is a frequent breeding ground for post-closing dispute resolution.
Typical Flashpoints in 2026 Earn-Out Litigation
Once the keys are handed over, the relationship between buyer and seller often shifts from collaborative to adversarial. Current litigation trends highlight several recurring triggers:
- Post-Closing Operational Control: Sellers often allege that the buyer intentionally mismanaged the acquired business, diverted resources, or failed to support the division in a way that artificially suppressed the target's ability to hit the earn-out milestones.
- Accounting Methodology Manipulation: Earn-outs are tied to precise metrics like EBITDA, net revenue, or user growth. Disputes frequently arise over how corporate overhead is allocated, or how new R&D expenses are accounted for under GAAP.
- Inconsistent Definitions: Ambiguities in the initial Purchase Agreement regarding what constitutes "extraordinary events" or how subsequent bolt-on acquisitions affect the earn-out calculation.
Because post-closing operational friction is notoriously difficult to litigate after the fact, the true defense begins at the drafting table. Utilizing sophisticated M&A and corporate capabilities during the initial term sheet stage ensures that financial metrics are mathematically bulletproof long before a dispute can ever materialize.
Strategic Takeaways for Risk Management
To navigate this high-risk M&A environment, dealmakers must adapt their approach during both the due diligence phase and the drafting phase.
- Litigation-Proof Your Purchase Agreements: Do not treat earn-out provisions as a secondary afterthought to close a valuation gap. Be explicit about accounting metrics, include detailed hypothetical calculations in the schedules, and clearly define the buyer's post-closing operational obligations (e.g., whether they must run the business to "maximize the earn-out" or merely use "commercially reasonable efforts").
- Engage Independent Counsel Early for R&W Claims: If a breach is discovered post-closing, involving experienced dispute resolution counsel early can dictate the success of an insurance claim. Navigating the strict notice requirements and detailed evidentiary demands of R&W insurers requires a strategic, litigation-ready approach from day one.
As the market continues to evolve, the line between a successful transaction and a protracted legal battle comes down to precise drafting and proactive risk management.
