Insurance Primer Geared for Tech Execs

Technology companies come in all shapes and sizes, but there are a few things every tech executive should know about insurance. This article discusses the top five things every tech CEO, CFO, COO, GC or Risk Manager should know about insurance. If you are a busy tech executive, this article may not answer every question you have about insurance, but it should give you the information you need to start asking the right questions. 

1. Insurance can be a valuable risk transfer tool, but only if you understand the unique risks your company faces. The first step in any conversation about insurance begins with a careful evaluation of the risks your company faces and the insurance products available to help mitigate those risks. A software company, for example, faces a very different set of risks than a company that provides technology-based consulting services. Once you have identified the unique risks your company faces, an insurance broker can help you better understand the various insurance products available to help mitigate those risks, the amount of insurance you should purchase, and the cost of that insurance.

2. You should have a general understanding of the basic types of insurance available to help mitigate risk. At a very high level, there are two different types of insurance: first-party insurance and third-party insurance. First-party insurance, generally speaking, covers the policyholder’s own property or losses. By contrast, third-party insurance covers the policyholder’s liability to third parties for losses incurred by those third parties. Most companies will have a mix of first-party (e.g., property insurance) and third-party (e.g., commercial general liability) insurance. Ideally, your company’s insurance policies will fit together like a carefully constructed jigsaw puzzle with no gaps in coverage.   

3. Be careful when purchasing insurance to make sure your policies meet your needs. Insurance policies are complex instruments that use many terms that have specialized meaning within the insurance industry. Also, despite sometimes broad promises of coverage, exclusions or conditions to coverage may strip much of that coverage away. In addition, terms like an arbitration provision may seriously limit your options if you find yourself in a coverage dispute down the road. Before paying your premium, you should carefully review the proposed policy and request changes as appropriate, but keep in mind that the negotiating history of a policy may impact how that policy is interpreted if you make a claim.

4. You should seriously consider cyber insurance. Cyber insurance is a relatively new form of insurance that provides a mix of first-party and third-party coverage for common cyber exposures like data breaches and ransomware attacks. A typical cyber policy will generally provide coverage for first-party cyber exposures like the cost to conduct an investigation into the cause of a cyber security failure, the cost to restore electronic data damaged by a cyber attack, and business interruption losses caused by a cyber attack. At the same time, a cyber policy will also generally provide coverage for liability your company may have to third parties arising out of a cyber attack, including any legal fees incurred by your company defending itself against lawsuits arising out of the attack. As the number of cyber attacks has increased over the past several years, the importance of cyber insurance has also increased. Tech companies are often particularly vulnerable to cyber attacks. As a result, cyber insurance has become must-have insurance for many tech companies.

5. You should also consider intellectual property (IP) insurance. Your IP may be your most important asset, and IP insurance is one way to protect it. Certain insurers sell IP insurance policies that promise to provide defense and indemnity coverage in the event that you are alleged to have infringed on another company’s IP. Moreover, some insurers market policies that help you enforce your IP rights against someone who has infringed those rights. This is a specialty insurance market and you would want to consider the price of such policies as well as the terms of coverage offered, but IP insurance may help you protect this vital asset.

Although these are only a handful of insurance coverage considerations, they will hopefully encourage you to think about the role that insurance can play in your company’s risk management strategy. As with many other things in life, you should think about these issues ahead of time, before your company finds itself facing a potential insurance claim.