Why OSS Audits Matter in Insured M&A Deals
In modern M&A transactions, insurance has become a key part of the deal structure. Representations and warranties insurance (RWI) is now commonly used to protect both buyers and sellers from unexpected liabilities. But as software becomes central to nearly every company, insurers are increasingly looking at one specific risk area: open-source software (OSS) compliance.
Open-source software is everywhere. Whether a company builds technology or simply uses SaaS tools, its codebase likely relies on OSS components. This isn’t inherently risky—OSS powers innovation—but unmanaged or poorly documented usage can lead to license violations, IP disputes, or rework costs after acquisition. And those risks matter not just to buyers, but to insurers underwriting the deal.
The Role of Insurance in M&A
RWI policies are designed to cover financial losses stemming from breaches of representations made in the purchase agreement. One common representation is that the company owns its IP and hasn’t misused third-party code. If, post-closing, the acquirer finds that a critical component of the target’s software stack includes non-compliant OSS (for example, a GPL-licensed library used in a proprietary product without source code disclosure), that could trigger a claim.
For the insurer, this is a problem. They're on the hook for losses resulting from something that could’ve been identified earlier. That’s why insurers are raising the bar when it comes to technical due diligence. Increasingly, they expect buyers—or targets—to conduct a full OSS audit before binding coverage.
Why OSS Audits Are Becoming Standard
An OSS audit identifies what open-source components are present, what licenses apply, whether the company is meeting its license obligations, and whether any problematic licenses (e.g. copyleft or custom non-OSI licenses) are in use. It’s similar in spirit to a financial audit but focused on license exposure and software governance.
For insurers, this audit provides visibility. It helps them understand the likelihood of a claim tied to OSS issues. It also helps define the scope of coverage—what’s included, what’s excluded, and whether a premium adjustment is needed. In some cases, insurers may refuse to cover software-related representations if an OSS audit hasn’t been performed.
A Hidden Risk with Real Consequences
Failure to comply with OSS licenses doesn’t always lead to litigation, but it can still create disruption. Acquirers may need to replace or rewrite non-compliant components, delay product releases, or even renegotiate parts of the deal. From the insurer’s perspective, each of those outcomes creates financial and reputational risk.
And this is not theoretical. There have been real-world cases where post-deal software issues—especially those involving copyleft licenses—have led to claims under RWI policies. Even if the insurer pays out, the process is costly and messy.
What Startups and Buyers Should Do
Whether you're the buyer, seller, or insurer in an M&A transaction, the takeaway is simple: OSS compliance is now part of the deal hygiene. Performing an audit before the transaction closes can help:
For startups, aligning with standards like ISO/IEC 5230 can help signal readiness and maturity. For buyers and insurers, it’s a way to reduce surprises and safeguard value.
Some Final Remarks
As insurance becomes more central to the M&A process, technical diligence needs to evolve too. Open source audits aren’t just about checking a box—they’re about enabling confidence in the deal. In a world where software is business-critical, OSS governance is no longer optional. It’s part of the risk—and the value—you’re insuring.
Note: The preceding text is provided for informational purposes only and does not constitute legal nor business advice. The views expressed in the text are solely those of the writer and do not necessarily represent the views of any organization or entity.
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