So much of the legal side of your business focuses on defining how things should be when everything goes right: what kind of governance structures to follow, and what kind of service contracts to sign. It’s easy to forget that another equally important side of setting up the legal aspect of your business is anticipating and planning for when things go very, very wrong. That’s where insurance comes in.
When you’re just starting out, it’s easy to feel overwhelmed by the diversity (and complexity) of insurance options available. It’s also equally easy to feel tempted to skip insurance altogether, especially if you’re buoyed by the optimism of early success as so many emerging tech services companies tend to be. Don’t. Instead, we recommend you focus on getting the most important types of insurance to protect your most valuable asset, your company.
The most basic insurance you need to start off with is a Business Owners Policy: a Swiss Army knife of a policy package that gathers multiple types of coverage into one convenient package. It bundles together property damage insurance, liability insurance, and even business interruption insurance. This is the kind of insurance you need if a catastrophe forces you to shut down your business operations temporarily.
Without business owner’s insurance, you'd be left facing loss of income alongside whatever other expenses you incur for repairs, rebuilding, or relocation. But with business owner’s insurance, you can get back on your feet in no time.
Professional liability insurance is also known as errors and omissions insurance. This is particularly crucial for emerging tech services companies, where even the smallest mistake could lead to far-reaching and unpredictable consequences. Professional liability insurance protects your company from claims of negligence, errors, or omissions as a result of your employees’ actions.
In a service delivery context, this is the insurance that protects you in case a critical bug slips past your QA processes and wreaks havoc in a client’s business. It will cover your legal fees and damages so you can focus on fixing the problem and restoring your reputation.
Also known as employee dishonesty coverage or fidelity bonds, fidelity insurance can be thought of as protection against human nature. In an ideal world everyone we work with would be honest, trustworthy, and acting without malice. In reality, people sometimes put their self-interests above their integrity or the potential of harm to others. That’s where fidelity insurance kicks in, protecting your business from losses caused by theft, fraud, or other dishonest acts committed by employees.
Tech services companies often have access to privileged data and confidential systems. If an employee misuses that access - for example, to steal funds from a client’s coffers - fidelity insurance will see to it that you’re not left bearing the penalty.
According to Forbes cybercrime costs are expected to hit USD 10.5 trillion by 2025, so the reality of data breaches and cyber attacks is not one to take lightly. For tech services, who make their living working with digital systems, the need is even more pressing. No matter how carefully you implement internal security processes, you may still end up with a major incident on your hands. That’s where cyber insurance comes in - protecting you from losses related to data breaches, cyber extortion, malware attacks, and other cyber threats.
Often called D&O insurance for short, Directors & Officers insurance is a necessity for when you are setting up a board. One of the most common scenarios in which you will need to form a board is if your tech services company is considering external investment, in which case the investor will want a board seat as part of their investment deal. This type of insurance protects your company's directors and officers from personal liability in the event of lawsuits alleging wrongful acts or management decisions. Someone serving on the board would want this insurance to protect themselves personally from actions taken by individuals.
You may need to purchase some other insurance like commercial auto insurance for company vehicles to umbrella liability insurance. Most of these policies are nice to have but can safely be deferred until a customer contract requires adding the insurance. You won’t need them when just starting out. Similarly, some investors may require you to take on key person insurance. This is a type of life insurance on the life of key individuals with the beneficiary being the company. It allows the company to survive the loss of a critical executive or founder.
When you just start you may feel insurance is not necessary. But it is. Your business is your most valuable asset. And you need to protect it, for yourself and for the sake of your other stakeholders including investors and employees. Small customers may give you work without insurance. But all the work that you do is creating land mines that can blow up on you in the future.
So you need to get the appropriate insurance in place ASAP. This lingering liability can last for the lifetime of the company including up to an M&A event. Even more importantly, a large enterprise company will not give you contracts until you are able to show that you are insured. So you will not enter the big leagues until you follow the advice in this article.