Use of the coverage is booming. According to a report from Marsh, it placed 450 transitional risk policies, such as representations and warranties insurance, worldwide in 2015, up 32% from the total in 2014. Limits on those policies totaled $11.2 billion, up 45% from the previous year.

Transactional insurance can smooth the process of negotiating a deal, Schioppo said.

"A seller doesn't want to leave a lot on the table, and a buyer wants to get protection," he said. "Transactional risk insurance takes away that kind of rub between buyer and seller over negotiations about who's going to take what risk post-closing."

PE firms often dispose of properties via auctions, and Schioppo said they encourage would-be buyers participating in the auctions to use transactional insurance. If a bidder doesn't want to use the coverage, "it makes that offer look a lot less attractive," he said.

Andrew Lucano, a partner at the law firm Seyfarth Shaw and vice chair of its mergers and acquisitions practice, said the pickup in the use of representations and warranties policies also reflects improvements in the coverage.

"The product has become so user-friendly and much cheaper than it was, say, 10 years ago," said Lucano, pictured at left. "The product is really easy to use, can be put in place extremely quickly, and in the grand scheme of things is not really that expensive for the peace of mind you get, on both the buy side and sell side."

The insurance is used most often in transactions that range in size from $50 million to about $2 billion and that involve a private company as the target, Schioppo said. The coverage makes less sense for deals that involve publicly traded companies, as they are required to disclose more about their business. In addition, he said, bigger deals "have been done forever as 'as is, whereas'—this is it, this is what you're getting. And there's not enough capacity to make a difference in that deal."

Of course, taking out insurance requires paying a premium, while using an escrow account could generate some interest on the funds.

But Kirk Sanderson, senior vice president of transactional risk at Equity Risk Partners, an insurance brokerage and risk management consulting firm, said the cost of an insurance policy has to be balanced against private equity firms' need to return money to their investors—investors who are expecting an annual return on their funds.

"For every year it sits there [in escrow], you're losing money," Sanderson said.

A survey by Seyfarth Shaw of the terms in more than 200 transactions in 2015 that were worth less than $1 billion linked the use of representations and warranties insurance to the competitive M&A environment. That environment is also affecting the use of escrow, according to the report, which showed deals are using shorter escrow periods and the median amount held in escrow accounts was decreasing.

Lucano said he doesn't expect the use of insurance to wane if the mergers and acquisitions environment changes.

"Because it's such a win-win for both buyers and sellers, and makes the deal negotiation on certain points much more palatable, I think the product is going to be here irrespective of whether the M&A market is booming or busting," he said. "This is now a very useful tool for getting deals done."

Corporates Get on Board

The use of insurance in M&A is now spreading among companies doing deals that don't involve a private equity firm. According to the Marsh report, corporations around the world purchased 44% of transactional policies in 2015, up from 39% in 2014, while private equity firms purchased 56%, down from 61% in 2014. In the U.S., corporations purchased 39% of policies in 2015, up from 32% in 2014, while private equity firms purchased 61%, down from 68% in 2014.

"The corporate world was a little slower to start using it because they weren't used to not getting traditional indemnities," said Schioppo, pictured at right. "But because of the way the market is run and these auctions, it's the only way that they can compete."

Lucano said that in cases where the sellers of a company become employees of the acquiring company, using insurance eliminates the awkwardness of pursuing a claim against a company's own employees.

"Now the buyers can just go to a third party and make this claim, as opposed to having this very uncomfortable situation of making a claim against the people running the business they just bought," he said. "The sellers, they're out of it on the risk side, and it's just the insurance company's issue."

Lucano said buyers should ensure that there are no gaps in the coverage. Areas that may be excluded in representations and warranties policies include privacy, data security, and issues related to the Foreign Corrupt Practices Act and transfer pricing.

"If there's a known problem—let's say there's litigation going on in the company—the insurance company under representations and warranties [insurance] is not going to cover that known problem," he added. "The buyer would have to have a remedy against the sellers for something like that."

Companies still need to do a careful assessment of the business they're acquiring even if they plan to buy insurance, Schioppo said. "Insurance doesn't make a bad deal good.

"It's not just, buy insurance and forget doing our homework," he said. "Companies will do their normal due diligence—quality of earnings checks, legal due diligence, tax due diligence."

The information gathered in that process will come in handy when they go to buy insurance, Schioppo said. "If the carriers don't have a road map to follow, they're not going to give you a policy."