Identifying Insurance Needs for SaaS CompaniesInsurance Explained
For the past decade, the SaaS (software as a service) model has been the dominant software service delivery method and one of the fastest growing IT industries worldwide. And it’s very easy to understand why the SaaS model has had such a massive impact, considering the convenience and ease of use that this operating model has ushered in.
Namely, instead of having to pay for on-premise hardware or licensed software, users can simply pay a monthly or annual fee to get the software they need, delivered to them instantly via a cloud provider. Best of all, the users are also freed from having to worry about maintaining the servers and data centers that power the software they use.
It’s, therefore, no surprise that the SaaS market is showing no signs of slowing down, growing nearly five times faster than the traditional software market, and expected to surpass $112 billion by 2019. Due to the nature of cloud-computing and subscription-based delivery, the SaaS model allows businesses to not only considerably reduce costs but also increase the efficiency, productivity, and accessibility of all related business operations.
However, what this level of innovation and convenience does introduce is a unique risk profile from an insurance standpoint for the companies that offer software as a service to their customers. The key drivers of insurance needs for SaaS companies are the following:
Customer Data: Almost all SaaS companies store sensitive client data on their networks including PII (Personal Identification Information), payment information, and medical records. This means that SaaS companies are at risk of expensive data breaches and cyber attacks.
Customer Reliance: Typically, SaaS companies want their customers to have a deep reliance on their products as consistent renewals are crucial to the success of this business model. However, if your customers experience product downtime or if the product doesn’t deliver up to set standards, customers might elect to sue for losses thus incurred.
Insurance Needs for SaaS Companies
SaaS companies are typically fast-growing businesses, which means that the insurance needs of these companies will also grow quickly as their operations expand. As a SaaS founder, it’s incredibly important to work with insurance professionals who are familiar with your industry and can put together a proper startup insurance program that can grow with you as your risk profile changes.
Younger SaaS startups that are still in the process of developing their product, acquiring users, and raising capital should focus on establishing their insurance foundation with the following coverages:
- General Liability & Property Insurance: Before considering more advanced insurance products, most businesses first need general liability insurance. The general liability policy provides coverage for operating risks faced by most businesses arising from the day-to-day operations that may cause injury to a third-party. In addition, purchasing a property policy will protect your company’s physical assets against loss or damage resulting from fire, water damage, theft, and other perils including related loss of revenue.
- Directors and Officers (D&O) Insurance: D&O insurance protects the company as well as the personal assets of officers and directors from lawsuits alleging breach of fiduciary duty, misrepresentation, or mismanagement. Additionally, SaaS startups will likely be required to purchase D&O as a prerequisite for external funding, as most investors will require a seat on the board of directors and want to know that their personal assets will be protected.
- Workers Compensation Insurance: Workers comp will pay for medical care and lost wages if an employee suffers a work-related injury. For SaaS companies, the cost of this policy will be on the lower end since most work is behind a desk. The lower the risk of physical harm or injury on the job, the lower your rates will be.
Once your SaaS company has an existing user base and stable revenue, the following coverages need to be added:
- Technology Errors & Omissions (E&O) Insurance: SaaS products are considered to be services by insurance providers. This is why technology E&O insurance is one of the most important insurance products for SaaS companies. This insurance policy will cover liability and property losses a customer incurs from any errors or omissions related to the services offered by your software.
- Cyber Liability Insurance: A cyber insurance policy will cover the costs associated with data breaches and cyber attacks including any violations of breach notification laws or your privacy policies. These costs include notification, public relations, and credit monitoring expenses, as well as civil damages. Most policies will also provide access to cyber forensics experts after the breach to understand how it happened and what can be done to make sure that the issues don’t repeat. The cyber liability and tech E&O policies are typically combined to respond to a complex set of product and data risks technology companies commonly face.
- Employment Practices Liability Insurance (EPLI): EPLI protects your company from employee claims related to issues such as wrongful termination, harassment, and discrimination. With EPLI claims on the rise, this line of insurance has become a crucial consideration even for smaller SaaS companies with only a handful of employees.
- Commercial Crime: Crime insurance policies provide protection from crime-related issues by both company employees and third parties. For SaaS companies, a crime policy would cover both physical and electronic losses of money, securities, or property arising from criminal activities.
- Key Person Insurance: Key person insurance protects the company in the case of the death or disability of a crucial contributor to the company’s success. The policy will help you recover from such an event by covering financial losses incurred as a result of the person’s death or disability and paying for the costs of finding and onboarding a proper replacement.
Highly-Publicized Examples of Insurance at Work for SaaS Companies
- Approximately 4,200 female employees of the California-based computer tech company Oracle filed a class-action lawsuit alleging that the company paid some of its female employees over $13,000 less than men working the same jobs. See: Oracle systematically underpaid thousands of women, lawsuit says
- In 2017, the credit reporting giant Equifax was hit with a data breach that affected nearly half of all US citizens. See: Equifax’s Data Breach Costs Hit $1.4 Billion
- McAfee Inc. antivirus provider has reportedly agreed to pay $80 million to resolve a class-action lawsuit alleging it automatically renewed customers’ security software subscriptions at a higher price than promised. See: McAfee Reaches $80M Auto Renewal Pricing Class Action Settlement
Buying Insurance for Your SaaS Company
The most pressing question for most companies looking to buy insurance is obviously, “How much will it cost?”
The answer is that there really are no fixed figures to go by since every SaaS company has a different risk profile depending on a number of important characteristics of the business that are taken into consideration when underwriting insurance policies.
The most significant factors when it comes to determining how much SaaS companies will have to pay for insurance tend to be the number of employees, revenue, the nature of the company’s services, its claims history, and the volume of PIIs stored. Location tends to be another quite important factor since each state has a different set of requirements and legal characteristics that will affect the price of coverage.
When it comes to securing the right insurance coverage it’s imperative to work with a partner that understands your unique needs and will ensure that you will be able to intelligently protect your business. The unfortunate fact is that the majority of the insurance industry still hasn’t caught up to the needs of high-growth, innovative SaaS companies. However, this doesn’t mean that you have to settle for an inferior insurance product.
With one of the fastest-growing technology client portfolios, Embroker’s Technology Practice Team has been delivering effective solutions to technology businesses for over 20 years. If you need more help or information, you can reach out to our team of expert brokers. Or, if you prefer to get started on intelligent quotes, you can get started by creating an Embroker account today.
Venture-backed SaaS companies can get market-leading D&O, EPLI, E&O, and cyber insurance in minutes through the Embroker Startup Program – click here to get an instant quote.
Directors and officers insurance protects your company’s management should they be personally exposed to liability claims for the business decisions and actions they made while running the business. The directors and officers policy, which usually protects the company as well, will cover the legal fees, settlements, and all other related costs that stem from allegations of breach of fiduciary duty, misrepresentation, or errors & omissions brought against your company’s board of directors or officers.