Tech Company Insurance in the Digital AgeInsurance Explained
Tech company insurance is a serious matter. As the global technology industry continues to grow, so do the risks. In today’s tech and startup world, lawsuits are common and can be very expensive, D&O claims especially.
Reports indicate that one in four companies experienced a claim over the last three years, with an average reported loss of $387,000. The same survey showed that companies who did not buy D&O insurance ended up losing an average of close to $400,000.
It isn’t hard to understand how losses of this magnitude could easily cripple young tech companies and startups. Unlike public companies that have highly publicized lawsuits from shareholders, private companies often get sued by customers, partners, vendors, and other third parties.
Furthermore, the number of data breaches companies experience continues to rise year after year. In 2021, reported data breaches increased by 68% from 2020. Surpassing the previous record set for cyber data breaches in 2017.
Professional social media network, LinkedIn experienced a large data breach in 2021 where more than 700 million user accounts were affected. If these types of things can happen to big companies, like LinkedIn, they can happen to anyone.
That’s why tech companies of all sizes need to be properly insured against cyber threats. Moreover, just because your business operates in the technology industry doesn’t mean you’re immune to mundane risks.
A break-in at your premises could lead to expensive hardware being stolen. Or a fire could break-out, and wipe out equipment that’s crucial to your operations. Additionally, any company can be held liable if a defect in their product causes damages to third parties – and technology companies are no different.
For example, if your application malfunctions and causes financial loss or even physical harm to its users, you could have a lengthy and expensive lawsuit on your hands.
Who Needs Tech Company Insurance?
Most businesses providing technological services, expertise, or products should strongly consider protecting their operations with tech company insurance. In particular, this includes:
- IT consultants and technology service providers
- Communication companies
- Electronics or hardware manufacturers
- Marketplace (On-demand) companies
- Businesses working on sustainability and clean technology
- E-Commerce stores
- SaaS Providers
- Software development companies
- Companies operating in extremely high-risk industries, such as fintech or biotech businesses
- Drone manufacturers and service providers
What Tech Company Insurance Policies Do You Need?
While every business has a specific set of tech company insurance needs depending on its size and industry, there are certain insurance policies that technology companies should consider to be mandatory parts of their business insurance program:
Directors and Officers (D&O) Insurance:
Covers defense costs and damages (awards and settlements) from wrongful acts, allegations, and lawsuits brought against your company’s board of directors and/or officers. It’s a type of insurance that was designed for the purpose of protecting your company directors (both current and past) from lawsuits and litigation.
In tech companies, the personal assets of the directors and officers are often at risk, which is why most tech companies and startups start their insurance programs with this type of insurance, as it is absolutely mandatory to have so that these assets are properly protected.
It is common to see professional investors working with technology companies request a seat on the board of directors. To reduce their risk, investors usually won’t consider putting money towards tech companies that do not have D&O insurance.
Technology Errors & Omissions (E&O) Insurance:
Considered one of the most important insurance types for tech companies because it defends your company if your service or product does not perform the way that it is supposed to perform. Most businesses would be able to simply buy product liability insurance to cover themselves in the event that their product fails in some way or another.
However, products such as software are not covered by these types of policies, which is why insurance for software companies is needed.A tech E&O policy is going to cover not only liability losses but property losses that are related to the performance of your product.
Many business owners tend to confuse tech E&O insurance with cyber insurance, but differences exist. Tech E&O insurance is designed to cover financial losses that a customer incurred as a result of any errors or omissions related to the service or product that your company provided to them, while cyber insurance focuses on sensitive data.
Cyber Liability Insurance:
Covers first-party costs associated with a data breach, including forensics, notification costs, and credit monitoring.
This type of insurance also protects from third-party lawsuits involving various network security and privacy-related losses and protection against costs related to cyber extortion, regulatory fines and penalties, and PCI fines, penalties, and assessments.
A good cyber insurance policy should cover the costs of defending or settling a lawsuit if you are sued by a client or partner whose data was breached because of something your company did or failed to do. It should also cover all of the financial losses the customer incurred as a result of the data breach.
The more robust cyber insurance policies will cover both first and third-party damages and should work hand in hand with your technology E&O policy and more traditional types of related business insurance, such as commercial crime.
Employment Practices Liability Insurance (EPLI):
Provides protection against employee claims related to issues such as wrongful termination, harassment, and discrimination.
Unlike workers compensation, EPL insurance is not mandated by state governments, so it might be easy to overlook, especially for small tech companies who don’t believe that they have enough employees to warrant such a policy.
What is the Cost of Tech Company Insurance?
A frequent question we hear (and a common problem with insurance underwriting in general) is that no one really knows how an underwriter arrives at a premium.
Your company’s premiums are primarily determined by:
- The number of employees
- Projected 12-month revenue
- Services offered (assurance, tax, consulting, etc.)
If you’re an early-stage startup, you might not have any projected revenue for the following year.
In this case, certain insurers will determine your premium based on the square footage of your physical business location(s) or your payroll. Embroker believes in giving our clients better choices using data and transparency.
We benchmark your policies against similar companies in your vertical, then procure quotes from multiple insurance carriers for coverage you may not carry and want to consider purchasing. We also cross-reference your costs with companies of comparable:
- Claims history
- Risk tolerance
- Policy limits
So we know your premiums are as competitive as possible.
Once set up on our platform, our tools and data ensure you’re adequately covered and getting the best value possible in the insurance marketplace, even as market conditions change and your business grows. How much you can expect to pay for tech company insurance depends on a number of important factors. When it comes to determining premiums, generally, the same rules apply for most industries.
One of the most important factors for tech companies is how many people the company employs, both full-time and as contractors. Obviously, the greater number of employees, the more you can expect to pay for workers’ compensation, E&O, and EPLI.
Is your tech company or startup profitable? The more money your company is making, the higher your premiums will be, simply because of the potential for professional liability lawsuits increases along with your sales and business growth. The type of business you are also plays a big role in how much you are going to be paying for tech company insurance.
If most of your employees are working in your office and sitting in front of computers all day, your rates will obviously be lower than if you have employees who travel often and work on other people’s property. If your tech business handles a lot of sensitive customers and partner information you’re obviously going to pay more for cyber insurance.
The number and types of business contracts that you have signed with clients, investors, and partners will obviously have an effect on your E&O policy’s cost as well. As expected, your claims history is taken into consideration as well and the cleaner it is, the lower your premiums will be.
And finally, your location is important too, not only because of potential threats or natural disasters but also because each U.S. state has different requirements and other legal characteristics that can affect the price of your coverage.
Tyler Chalk, Senior Account Executive, has been part of the Aviation & Aerospace Insurance Practice since 2015. Tyler sat down with the Embroker Team to share how he helps companies manage risk and customize insurance policies to fit their needs. Read on to learn more about Tyler.
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