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Insurance for SaaS Companies

The definitive guide to business insurance for SaaS companies and startups.

Software as a service companies, or SaaS as they are more commonly called, make up one of the fastest growing business models in existence today. The digital subscription-based methods that these companies employ to deliver their products and services make them uniquely susceptible to threats that more traditional offline services companies don’t face. Things like the potential for downtime as a result of infrastructure failure or the threat of a data breach as hackers become more sophisticated make the right commercial insurance package from an experienced broker more important than ever.

SaaS Startups

Newer SaaS startups that are still in the process of developing their products, acquiring customers, and raising investment capital face a unique set of risks and will need to strongly consider policies like management liability which can also be called directors and officers (D&O) insurance.

Established SaaS Companies

SaaS companies with a completed product or service, an established customer base, and stable recurring revenue face a different set of risks than startups and need to pay close attention to errors and omissions insurance as well as cyber liability and data breach insurance.

What We’ll Cover

The purpose of this guide is to provide detailed descriptions and explanations of the business insurance policies software as a service (SaaS) companies should consider putting in place to properly protect their often digital and software-based businesses. Feel free to use the links below to jump ahead to any specific policies you’d like to learn more about.

The Foundation

Virtually every company, regardless of industry, begins their commercial insurance experience by purchasing either a general liability policy or a business owner’s policy making them the two most common and most recognized types of business insurance. SaaS companies are no exception. Before considering more specialized coverage like errors and omissions or cyber liability, ensure you put in a place a proper foundational general liability or business owner’s policy with appropriate limits to cover the general risks faced by most businesses including physical harm, property damage, and theft.

The property component of a BOP is intended to protect physical property purchased and owned by the company. For SaaS businesses, this includes items like office furniture, computers, servers, etc. When determining what limits to select for your property coverage, make sure you are using the current replacement costs for comparable versions of these items.

Errors & Omissions Insurance

Errors and omissions insurance, or professional liability as it is also called, is an essential piece of coverage that every established SaaS company and most SaaS startups need to consider. The insurance insurance carriers that issue policies consider SaaS businesses to be service providers and E&O insurance is the specific policy that protects against the failure of said services. Just like a products liability policy responds when a company’s physical good fails, a professional liability policy would respond if a SaaS product failed resulting in financial loss to the client or end user. Even more specifically, there are potentially two types of errors and omissions that SaaS companies may need to purchase.

  1. Technology Errors & Omissions

    Because all SaaS business are technology based, tech E&O is essential. As discussed above, it covers legal defense and settlement costs if you’re sued by a customer or customers because your software breaks or fails.

  2. Miscellaneous Errors & Omissions

    Many SaaS companies are using technology to specifically deliver traditional business services in a more modern digital manner. If your service is not historically technology oriented then you need to consider including a miscellaneous E&O policy. An example of the type of company that would need this coverage is an online lending platform. While they are leveraging technology to make borrowing money easily accessible online, the business of lending money is still largely conducted through physical banks and with paper applications. As a result, the insurance industry will treat an online lending platform like a traditional financial institution that would require a miscellaneous errors and omissions policy.

Cyber Liability & Data Security Insurance

In today’s digital age, cyber liability and data breach insurance is more important than ever. This holds especially true for SaaS companies and startups who often store large amounts of sensitive data about their customers or their customers’ customers. While standalone cyber and data security insurance is readily available and extremely affordable, ideally, it would be packaged with one of the errors and omissions policies discussed above to provide protection against both first and third-party losses. For detailed information about the differences between first and third-party losses as well as specific examples of the types of risks that cyber liability insurance protects against, consider downloading our free cyber liability insurance e-book below.

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Crime Insurance

Crime insurance policies provide a layer of protection that specifically covers theft by both company employees and third parties. For SaaS companies in particular, a crime policy would respond to cover both tangible and electronic theft including items like company checks, unauthorized wire transfers, illicit payroll runs, and more.

As digital currencies like Bitcoin and Ethereum continue to grow in popularity throughout the world, it’s important to distinguish that most crime policies specifically exclude the theft of cryptocurrency. For SaaS businesses that deal with or accept payment in cryptocurrency, you’ll want to carefully select a crime policy and insurer that does not exclude cryptocurrency theft.

Management Liability Insurance

Management liability insurance, or directors and officers insurance (D&O) as it’s often referred, is a type of policy that SaaS companies will likely be required to purchase when they obtain outside investment. Just as it sounds, D&O protects both the officers of a company as well as the investors who serve on the board of directors in the event that the company is sued for any number of reasons.

Management liability policies can be expensive so we typically don’t recommend that a SaaS startup purchase one until they have obtained outside funding from investors. In fact, purchasing D&O is often one of the first use of funds after closing.

Worker’s Compensation Insurance

The requirements surrounding worker’s compensation insurance vary by state so be sure to research the laws in your state before you begin hiring employees. On average, companies are legally required to purchase this type of policy once they reach or exceed 3 full-time employees including owners. It’s common for small business owners to exclude or opt-out of covering themselves with worker’s comp to lower premiums. This, however, is a dangerous decision. If you’re injured while performing a work-related task, your personal health insurance will not respond forcing you to pay out-of-pocket for any medical costs associated with that injury. Without worker’s compensation insurance, something as simple as getting into a car accident on the way to drop a check off at the bank could prove extremely costly.

The cost of this line of insurance for SaaS companies will be on the lower end as a result of the fact that majority of roles they fill are desk-based with a low risk of physical harm or injury. This is also a very scalable line of insurance so we strongly recommend all SaaS businesses establish a work comp policy sooner than later and even if you don’t meet the employee headcount at which point your state legally requires you to have coverage in place.

Employment Practices Liability Insurance

2016 Workplace Complaints

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EEOC
U.S. Equal Opportunity Employment Commission

Employment practices liability insurance (EPLI) is a key type of coverage for SaaS companies especially as they raise money and scale their teams. Further, several modern SaaS startups have made headlines in recent months and years as a result of hostile work environments and rampant reports of employee sexual harassment. Technology-based startups and their business models are inherently tied to rapid growth and rapid growth makes putting the proper human resources controls and policies in place to prevent employment liability challenging. As a result, every SaaS company should strongly consider putting in a place a scalable employment practices liability insurance policy to protect against claims including sexual harassment, wrongful termination, and hostile work environments. This policy would ideally go into effect around the same time your worker’s compensation policy is being placed.

For more detailed information about employment practices liability insurance along with some employment and human resources best practices advice, consider reading this employment practices liability insurance blog post.

Umbrella

An umbrella policy is one of the easier commercial lines of insurance for business owners to understand. Just like with personal insurance and as the policy name implies, an umbrella policy is an additional layer of protection that sits on top of any existing liability policies. For example, if you purchase $5,000,000 of umbrella coverage, you literally have $5,000,000 of protection in addition to the limits of your general liability and commercial auto liability policies. Most importantly, a standalone umbrella insurance policy will cost you much less than simply increasing the coverage limits on your other liability policies.

As a rule, umbrella insurance only extends to other liability insurance policies. For example, umbrella policies do not provide additional protection for property insurance. Additionally, cyber liability insurance is an exception to this rule. So, because it’s excluded from umbrella protection, make sure you’re always selecting an appropriate limit when purchasing cyber liability or data breach insurance.

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