The Ultimate Guide to SaaS Business Insurance
Software as a service (SaaS) is a relatively new industry, but providers of these services are proliferating. Today, the SaaS market is worth $197 billion, and will only continue to grow. Whether you’re thinking about getting into the industry or already own a successful company, one of the most important things you need to be successful is SaaS business insurance.
What makes the SaaS industry unique?
The SaaS industry is generally high-risk, and comprehensive insurance is a must-have. There are a couple of things that make this industry unique:
- Access to sensitive data: Nearly every SaaS company stores personal data on its networks. That could include payment information, personal identification information, like Social Security numbers, names, and phone numbers, and even medical records.
- Customer reliance on your product: Many SaaS products are subscription based, which means that customer renewals – and therefore customer reliance – are important for you to succeed. That also means customers will be especially upset if your product doesn’t deliver as expected.
The more these two factors apply to your company, the more you need SaaS business insurance.
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Importance Of Insurance For SaaS Companies
If you own a SaaS business, you know you need insurance. But do you know just how important it is? Here are the top reasons to make sure you have comprehensive coverage.
- De-risk your business: As we mentioned, SaaS companies take on a lot of risk. Client information could be compromised. Customers could be dissatisfied. Your developers could even accidentally infringe on another company’s copyrights. SaaS business insurance helps protect you from the financial consequences of a variety of mistakes.
- Satisfy client requirements: If you work with other businesses, your clients may want you to carry insurance. That way, if there’s an outage or data breach that costs them money, they’ll be covered.
- Comply with the law: Almost every state requires businesses to have workers compensation insurance if they have one or more employees. If you have an office, your landlord might also require you to carry certain insurance.
Types Of SaaS Insurance
There are all kinds of software out there, and every SaaS company is unique in the risks it faces. But in general, all businesses in this industry share some characteristics that make the following types of insurance must-haves.
Errors and omissions (E&O) insurance, also called professional liability, covers you against claims of negligence, oversights, or other mistakes in your software that cause your clients to lose money. For example, if you build a website for a client, but there’s a glitch in the code that prevents orders from going through, tech E&O will help you pay for the costs of your negligence, including court costs, settlements, and judgements. It also covers you if you miss a deadline or don’t deliver agreed-upon services.
SaaS Cyber Insurance
SaaS companies often store, process, or transmit vast amounts of sensitive client and user data, and a breach could result in significant financial and reputational damages. You might have to pay for an investigation and incur expenses from notifying customers. Customers could even sue you. Cyber liability insurance helps mitigate these financial repercussions.
Commercial general liability (CGL) is the baseline insurance that every business should have, regardless of industry. It covers:
- Third-Party Injuries: If a client or vendor is injured at your office, premises liability under this policy can cover medical bills and potential legal fees.
- Property Damage: If you or your employees damage a client’s workplace during a visit or damage your neighbor’s property during regular business operations, you’ll be covered.
- Reputational Harm: Personal and advertising coverage provides protection against claims like slander, libel, and copyright infringement that can threaten the company's public image.
Directors and Officers
Directors and officers insurance (D&O) is often overlooked and misunderstood, but we think it provides some of the most necessary SaaS insurance coverage:
- Investor Relations: Protects the company's leadership against lawsuits from investors relating to business performance, fiduciary duty breaches, and other managerial decisions.
- Regulatory Actions: Covers legal fees and settlements stemming from actions brought by regulatory bodies against company leadership.
- Recruitment and Retention: Makes the company more attractive to experienced executives, because they know they’re protected against personal liabilities.
While general liability covers property damage you cause, you’ll also need property insurance if you have an office space. This insurance covers:
- Assets: The physical assets of the company, such as servers, computers, and office equipment, against theft, damage, or loss.
- Business Interruption: Lost income and operating expenses if the company's operations are halted or delayed due to a covered property loss.
In most states, insurance for SaaS companies must include workers compensation if you have one or more employees, even if they’re part-time. It covers:
- Employee Injuries: Medical expenses and a portion of lost wages for employees who become injured or ill on the job.
- Lawsuits: Liability for the company if an employee decides to sue for injuries caused by the employer's alleged negligence.
You only need commercial auto insurance if you have company-owned vehicles – in fact, many states require it. It covers:
- Accidents: Damages related to accidents involving company-owned vehicles, protecting the company from significant out-of-pocket costs.
- Non-owned Auto Liability: Damages related to your employees’ use of personal vehicles for work purposes, if their insurance doesn’t cover the full damage.
Periods of growth and downsizing can increase the chances of lawsuits related to employment practices, making this an essential type of SaaS business insurance because it will cover you for:
- Employee Lawsuits: Claims from employees related to discrimination, harassment, wrongful termination, and other employment-related issues.
- Legal Defense Costs: Attorneys fees and related employment lawsuit expenses.
Real-Life SaaS Insurance Claims Examples
Think you’ll never have to make a claim under your SaaS business insurance? Think again. These are some of the most common claims we see.
SaaS Cyber Insurance: Customer Data Breach
Scenario: A well-established SaaS company offers an online project management tool. An unknown attacker successfully breaches their security and gains access to thousands of customers' personal data, including emails, project details, and billing information. Affected customers start facing phishing attacks, and some report unauthorized transactions on their credit cards.
Claim: The company files an insurance claim to cover the cost of notifying affected users, providing credit monitoring services, managing public relations to control reputation damage, paying legal fees to defend against potential lawsuits, and paying regulatory fines for failing to protect personal data.
Directors and Officers: Misleading Investment Information
Scenario: A private SaaS company successfully raises millions in Series B funding, promising its investors rapid growth based on a set of projected financials and product roadmaps. A year later, the company fails to meet any of its promised milestones. An internal audit reveals that some of the projected financials were overly optimistic, based on inaccurate data, and that the company's leadership failed to disclose known risks.
Claim: Investors, feeling misled and foreseeing significant financial losses, file a lawsuit against the company's directors and officers. They allege that these individuals provided misleading information and failed in their fiduciary duties to act in the best interests of the investors. The company taps into its D&O insurance to cover legal defense costs, investigation fees, and potential settlements or judgments.
Tech E&O: Software Bug
Scenario: A SaaS platform offers accounting software for small businesses. Due to a software glitch, the software fails to update tax tables, leading to many businesses underpaying their taxes and facing penalties from tax authorities.
Claim: Affected businesses turn to the SaaS company for compensation for the penalties and additional accounting fees incurred to rectify the issue. The SaaS company then files a claim under its third-party liability coverage to handle these expenses and legal defense costs.
Challenges Of Purchasing Insurance For SaaS Companies
SaaS companies face a lot of unique risks – which lead to unique challenges when it comes to finding the right insurance. Here are the top situations we run into.
Insurers determine whether industries are high risk based on a number of factors, from the insurer not wanting to be involved reputationally, to the data showing the industry is unprofitable to underwrite, to exclusions on their reinsurance agreements. You might find it more challenging to get SaaS business insurance if you work in these industries:
- Adult entertainment
- Oil and gas
- Artificial intelligence
- Dating apps
It is possible to get coverage, but you might have to go to more specialized insurance companies.
Mission-Critical SaaS Businesses
Could your product malfunctioning or going offline jeopardize personal safety (for example, if your software controls industrial machinery) or cause a massive loss of revenue? Your insurance premium is going to be much higher than it would be for lower-risk software, like a program that generates AI stock images.
Need For Tech E&O
Unlike many lines of coverage such as auto, workers compensation, and general liability, tech E&O is not a standardized coverage, which means there is no apples to apples comparison. Each policy will be unique and will have to be evaluated on its own merits, not by simply looking at the exclusion page.
Dependencies on Cloud Providers
Many SaaS companies are completely dependent on cloud hosting and tools. This single source of failure can be a problem, especially if you want coverage for lost business income if one of your cloud providers were to go offline due to a cyber attack.
LandesBlosch: Talk to an Expert
In a high-risk industry like SaaS, insurance should really be customized by an expert. LandesBlosch works with some of the top SaaS insurers, including CFC Underwriting, At-Bay Insurance, Beazley, CNA, and Chubb. We can help you compare quotes and build the perfect policy for your SaaS business. Contact LandesBlosch today to get an online quote or talk to our experts about what’s right for you.
About The Author: Austin Landes, CIC
Austin is an experienced Commercial Risk Advisor specializing in property & casualty risk management for religious institutions, real estate, construction, and manufacturing.
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