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Insurance 101 For Technology Companies

Insurance has been around for hundreds of years. The industry first started by insuring ships and marine cargo in England back in the 1600s - the goal was to protect shippers and customers from a potential loss due to rough seas. Shortly after its inception, insurance became a cornerstone of the world's economy, protecting everything from your personal car and home to rocket launches and nuclear reactors.

Today, insurance provides peace of mind to the Technology sector, which is ripe with unprecedented innovation. The insurance industry has an important job to understand, embrace, and protect innovation coming out of Tech companies, small to large. In turn, Tech companies are obligated to protect themselves to instill trust in customers, partners, investors, and employees.

We want to dive into the world of insurance for Technology companies, breaking down complex terms and exploring real-world examples to give you a clear picture of what insurance means for the Technology sector.

Understanding the Basics: What is Commercial Insurance?

At its core, commercial insurance is designed to protect businesses from potential losses due to all kinds of failures or unforeseen circumstances. This could range from property damage and liability issues to employee-related risks. For Technology companies, the stakes are high because new products and services don't have a history of losses yet, which is central to underwriting. As a result, commercial insurance for technology risks tends to be more fragmented due to the novelty of underlying exposure. 

Real-World Example: Cybersecurity Breaches

To give you an example of insurance in action, consider a tech company specializing in data storage solutions. A breach in their cybersecurity could lead to significant data loss for their clients. In 2021, a major cloud services provider faced this exact situation, leading to reputational damage and financial loss. Cyber liability insurance, in this scenario, would cover the costs associated with the breach, including legal fees, notification expenses, and more. However, procuring such cyber coverage is never easy due to stringent underwriting requirements for tech companies in general. 

Diving Deeper: Types of Insurance for Technology Companies

General Liability Insurance (GL)

This is the foundation for any business insurance policy. It covers common risks like bodily injury or property damage. A tech company hosting a product demo, where a visitor trips over equipment and gets injured, would find general liability insurance indispensable.

Professional Liability Insurance (PL or E&O)

Also known as Technology Errors and Omissions (Tech E&O) insurance, this covers legal fees and settlement costs if your tech company is sued for technical or professional mistakes or negligence. For instance, a software development firm might release a product with a critical flaw, causing financial harm to a client. E&O insurance can safeguard against the repercussions of such oversights.

Cyber Liability Insurance (CY)

Essential for any tech company, this insurance protects against damages from cyber incidents. A notable example is the infamous 2017 Equifax data breach. This incident exposed sensitive information of millions and led to massive settlement costs, highlighting the importance of robust cyber liability coverage.

Property Insurance

This covers physical assets like buildings and equipment. Consider a robotics company whose warehouse is damaged by fire. Property insurance would cover the costs to repair or replace the damaged equipment and facilities.

Workers' Compensation Insurance (WC)

This is mandatory in most states and covers employees' medical costs and lost wages if they get injured on the job. For example, an employee at a construction tech firm might suffer an injury while handling heavy equipment, making workers' compensation insurance crucial.

Using Risk Management in Tech Insurance

With the advent of ERM (Enterprise Risk Management) automation, tech companies can now streamline their risk management processes. ERM automation tools offer a more integrated approach to managing various risks. These tools assist in identifying potential risks, monitoring risk exposure, and generating data-driven insights to inform insurance decisions.

Given that underwriters tend to be skeptical about new technology risks, ERM can alleviate the underwriter's concerns if used properly. That way, tech companies can become more insurable and save on coverage costs. 

Case Study: ERM Automation in Aerospace

An aerospace tech company used ERM automation tools to assess risks associated with their drone technology. This comprehensive analysis helped them understand specific liabilities and purchase tailored insurance coverage, ultimately reducing their overall risk exposure.

In Conclusion

Navigating the world of insurance for technology companies is not easy. Understanding the different types of insurance, real-world liability implications, and the role of ERM is key to protecting your products, operations, and people. Most of the time, tech companies get contractual requirements that obligate them to purchase insurance, and often, companies get caught by surprise with how stringent those requirements can get! That is why understanding insurance fundamentals and how they affect your business is crucial if you want to grow with peace of mind in the Technology space.