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RWI Retention Dropdowns: How They Work and Why They Matter
Stacey Hammer
Mar 31, 2025
As a transactional liability brokerage, we place policies including reps and warranties insurance (RWI), tax liability policies, and contingent liability policies. We also oversee claims for these policies. As someone who handles both, I recently had a client pose a claim question that can be confusing to many people: What is an RWI retention dropdown and how does it work? This question highlights a topic that often requires clarification in the realm of policy and claim management.
RWI policies are unique in many ways. They provide six years of coverage for fundamental and tax reps, and three years for general reps—the latter being statistically far more likely to have a substantial claim filed against them. The self-insured retention (SIR) is an aggregate one, meaning that all valid claims submitted for coverage will serve to erode the SIR for any future claims. In addition, most policies state that the initial SIR will drop down to a lower amount after a specified date, usually 12 months after the policy incepts/deal closes.
RWI policies provide retention dropdowns because the likelihood of claims arising after the initial 12-month period is much lower than in the first year of the policy period and they are usually less severe.
How to Apply the New RWI Retention
If the policy’s retention begins with one amount and then drops down to a quite lower amount (often 50% lower than the original SIR), how does one apply the SIR? This question becomes even more urgent when multiple claims are noticed under the policy, some arising before the dropdown date and some arising after.
Language within most RWI policies will state something along the lines of:
“The SIR is $X. This SIR will apply to all (covered) claims noticed prior to the specified dropdown date.
Should the SIR be partially eroded by covered claims, the retention will drop down to $Y, which will only apply to those claims noticed after the dropdown date.”
It’s easiest to consider these concepts in a practical scenario.
Let’s use an SIR of $500,000, with a dropdown SIR amount of $250,000. And let’s say the policy went into effect on January 1, 2025, and the dropdown date is January 1, 2026.
In this example, the insured has submitted several claims against this policy. Some arose and were noticed to the carrier before January 1, 2026, but some arose after that date.
| If the SIR is eroded by less than $250,000, the SIR will then drop to $250,000 for all claims noticed after the dropdown date. |
| For example, the policy covered a $100,000 claim, leaving $400,000 of the SIR as of January 1, 2026. The carrier will “write off” $150,000, dropping the new SIR down to $250,000 for claims noticed to the carrier after January 1, 2026. |
| If, however, the SIR is eroded by more than $250,000 as of the dropdown date, the insured will, in effect, have “eaten” that overage amount. |
| For example, $400,000 in covered claims eroded the initial SIR, leaving $100,000. The SIR for new claims noticed after the dropdown date will continue to be $100,000; there is no additional accommodation to be made because the SIR was less than the dropdown amount at the January 1, 2026, date. |
Understand Critical Details About Timing and Coverage
All of the above must also be considered in the context of RWI policy language, which includes a caveat stating that claims arising before the dropdown date but noticed to the carrier after that date shall be deemed to have occurred before the dropdown date. And, even if a notice of claim is provided to the carrier after the dropdown date, the original SIR can still apply if certain persons at the insured company had knowledge of the breach (or a matter that would be expected to give rise to a breach), loss, or third-party claim prior to that date. With this language, carriers seek to eliminate situations where insureds know of a potential breach but hold off on notifying the carriers until after the dropdown date to have the lower (dropdown) SIR apply.
Keep in mind, too, that RWI policies cover defense costs incurred in investigating and defending claims. They also sometimes cover prosecution costs incurred, including fees, costs, and expenses in connection with investigations, updates, analyses, and participation in moving a claim to resolution. (Note that these are simplified definitions and you should refer to your specific policy for the actual language of the definition.) This, of course, is only applicable to claims that are covered under the policy.
Having a knowledgeable broker is essential for securing a well-structured policy and having an advocate who can effectively handle claims. Your broker can provide invaluable assistance in navigating not only the language of an RWI policy but its application to any claims.
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