A SaaS Operators Guide The Basics of Business Insurance

What you don’t know, may hurt you. At least that is the case with SaaS companies and business insurance. Today’s topic may not be exciting, but it’s important and will help you grow revenue and raise funding faster. 

Few entrepreneurs or business courses talk about business insurance, but SaaS operators trying to sell into enterprises need to quickly get the right policies in order. Having the right insurance policies and coverages are often requirements for closing deals, finalizing funding and protecting your business.

If you have momentum to close on a fundraising round or a new client, do everything you can to eliminate any friction. My experience says the old adage is true: time kills deals.

In this blog post, we will delve into the importance of choosing the correct insurance for SaaS companies. Additionally, we will define, compare, and contrast three vital insurance policies:

• General Liability
• Cyber Insurance 
• Directors and Officers Insurance 

A good fractional CFO has an understanding the risks covered by each policy and will help SaaS companies identify which types of coverage are best suited for their specific needs. 

Let’s dive in.

General Liability Insurance

Background on General Liability Insurance

General Liability Insurance provides essential coverage for SaaS companies against third-party claims of bodily injury, property damage, and advertising or personal injury. This type of insurance acts as a foundational layer of protection for businesses operating in the digital realm and beyond. This insurance tends to be a bit more of a commodity and I’ve found that pricing is pretty competitive amongst carriers and easier to obtain.

General Liability Risk Coverages

• Bodily injury claims: If a visitor or client suffers physical harm while on the SaaS company’s premises, this insurance will cover medical expenses and potential legal fees. 
• Property damage claims: In case the company’s activities cause damage to someone else’s property, General Liability Insurance will provide financial coverage for repairs or replacements.
• Advertising or personal injury claims: This aspect of coverage protects SaaS companies against claims of slander, libel, copyright infringement, or other reputational damage caused by advertising activities.

Applicability of General Liability Insurance

General Liability Insurance is crucial for all SaaS companies, regardless of their size or maturity. It acts as a safety net for unexpected events that might lead to lawsuits or financial liabilities. In my experience, most enterprise customers will require coverage of at least $1M as a condition of signing a contract, but those coverages are increasing over time. 

Cyber Insurance

Cyber Insurance Risk Coverages

• Data breach response costs: In case of a data breach, this insurance covers expenses related to notifying affected parties, conducting forensic investigations, and managing public relations.
• Cyber extortion: If the company faces a ransomware attack or cyber extortion, the insurance policy can cover the ransom amount.
• Business interruption: Cyber Insurance can compensate for revenue losses and additional expenses incurred due to downtime caused by cyber incidents.

Applicability of Cyber Insurance

For SaaS companies, especially those handling customer data and sensitive information, Cyber Insurance is essential. Startups, mid-sized companies, and large enterprises dealing with valuable data must prioritize this coverage and having some level of coverage is table stakes to closing deals with enterprise customers. Increasingly, enterprises are requiring cyber insurance coverage for all vendors – it’s better to shoot first and ask questions later.

Cyber insurance coverage used to be a nice-to-have policy, but has increasingly become a requirement to do business with enterprise clients. The product is a more specialized coverage and requires more effort to obtain than a general liability policy. Expect a lengthy application and thorough review process where the underwriter delves into your risk and security policies. 

Also note that the specialized nature of understanding the risk means cyber insurance premiums are quite costly and the premium amounts will be impacted by the data your product handles, stores and processes. For Salesforce hosted companies, your inability to access or locally process data may work towards your advantage from a Cyber Insurance limit standpoint and is a point you may able to negotiate in a transaction. Some carriers might also require companies to have security certifications like a SOC2 or ISO. 

Directors and Officers (D&O) Insurance

D&O Insurance Risk Coverages

• Legal defense costs: D&O Insurance covers legal expenses incurred during the defense against lawsuits, including settlements or judgments, protecting personal assets.
• Shareholder claims: If stakeholders or investors bring lawsuits against the company’s directors and officers, this insurance policy provides coverage.
• Employment practice claims: D&O Insurance can also protect against claims related to wrongful termination, discrimination, or harassment.

Applicability of D&O Insurance

D&O Insurance is particularly important for SaaS companies seeking funding, conducting IPOs, or experiencing significant growth. As the company expands, so does the exposure to legal risks, making this insurance an essential safeguard for directors and officers. Also, some directors might require a D&O policy as a condition to agreeing to serve at the company.

Risks Not Covered By These Insurances

The 3 policies above do most of the heavy lifting for SaaS operators.

However, stakeholders should be aware of where they still have risk not covered by insurance. The list of items not covered is too long for this post, but here is my list of top risks not covered that operators should think about:

• Professional liability: General Liability Insurance typically does not cover errors, omissions, or professional negligence. For SaaS companies, these risks are better addressed through Professional Liability Insurance (also known as Errors and Omissions Insurance), which is designed to protect against claims arising from professional services provided.
• Intentional Acts: Insurance policies usually exclude coverage for any intentional or deliberate actions taken by the insured. If a SaaS company or its employees intentionally cause harm or engage in illegal activities, the insurance provider is unlikely to offer coverage for resulting liabilities.
• Known Cybersecurity Breaches: Cyber Insurance may exclude coverage for cybersecurity breaches that were already known or ongoing at the time of policy inception. Regular security assessments and updates are crucial to maintain coverage and are often requirements in maintaining a SOC2 or ISO certification.
• Intellectual Property Infringement: General Liability Insurance typically excludes coverage for claims related to intellectual property infringement, such as copyright, trademark, or patent infringement. For such risks, SaaS companies should consider Intellectual Property Insurance.

Wrapping Up

Closing deals and funding is a priority for most SaaS companies. Not having the correct SaaS business insurance in place is an underrated and little discussed risk. Also, salespeople and full-time and fractional CFO’s will quickly understand that negotiations over insurance requirements frequently become part of closing transactions.

Selecting the correct SaaS business insurance protects the company against potential risks and liabilities and may be the difference between winning or losing a deal. With the 3 insurance coverages listed above, and assuming you have adequate coverage levels, SaaS companies should have the basics in order to eliminate insurance coverage as a risk of not closing a deal or fund raising round. We recommend having insurance coverage in place before required to not slow down the momentum of a transaction.

If you don’t know where to start or who to contact to help you figure out your business insurance, Sanitas Accounting can help. Reach out and we’d be happy to help with strategy and implementation.

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