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Business Insurance


#1

Bootstrappers - do you guys take out business insurance?


How to start a solo web business without getting sued (US)
#2

Yes. I insure my office building and equipment, plus some liability insurance. IIRC it costs a few hundred pounds per year.


#3

Thanks Andy.

I’m still pretty small but getting to the point where I’ll hopefully be running my saas app full time within a fee months so I’m thinking about these types of things.

I’ve been doing a bit of online research and I found this answer to seem to make a lot of sense:

Basically if you’re not big enough to sue then don’t worry about it until you are.

Does that sound reasonable for a saas app just starting out?

I’m more thinking about cyber liability or e&o type coverage in my case - not too much equipment to worry about.


#4

I’m more worried about a tree coming through the roof of my office. ;0)


#5

We have errors and omissions insurance. Costs about $4,000/year :frowning:

I mostly worry about getting sued into oblivion!


#6

Thanks Ian! Sounds brutal but I’m sure for a business of your size it’s a no brainer.

What’s your take on when would be the right time (revenue level) for a bootstrapper to pick up some insurance like that?


#7

We’ve had errors and omissions insurance from very near the beginning, but we tend to be pretty conservative with these kinds of decisions. It’s based in large part on revenue. It won’t cost you anything to get a quote. I’d have it at anything more than a pittance of revenue. Also, of course I assume you’re properly setup as a corporation so if you get sued it’s not so easy (but not impossible) to get your personal assets, etc.


#8

Interesting. Good to know!

No I’m following the Dave Ramsey school of thought (or at least the version of it that my buddy explained to me) which is to not incorporate until I’m up around $300k of yearly revenue.


#9

I’d incorporate earlier than $300k revenue, probably, but that isn’t here nor there. LLCs cost a few hundred bucks and an hour of work to get set up – easily worthwhile if you have any assets outside of the business. (Both of mine are Nevada LLCs on advice of accountant, FWIW.)

Back to the topic: I have an E&O policy for both my businesses (one policy covers both LLCs). It runs about $2k a year, and the dominating factors for the quote are a) revenue, b) number of employees, c) exactly what type of “tech business” I’m in.

If you have difficulty getting a policy, email me, I’ll introduce you to my broker. She’s fantastic and speaks software, which is handy, because the insurance companies (even the ones with dedicated “tech business insurance” product lines) are totally clueless. She had to explain to underwriters the difference between on-premises and off-premises SaaS, for example.

You probably don’t need a policy if you’re just getting started in a non-critical B2C app. For example, Bingo Card Creator has nearly zero risk of getting sued. If it were my only business, I would have held off indefinitely.

For B2B, there are three major triggers:

  • Many purchasing departments at larger clients (enterprise or even, say, a startup with a B round) will require you to have a policy as a checkbox item for any purchase important enough to require a contract review. (i.e. $50 a month, no, $10k engagement, yes.)
  • If your software going down can potentially cause a total or substantial business outage for a client (e.g. Github, any analytics software which blocks page rendering if the JS isn’t working, etc), get it.
  • Just for basic peace of mind reasons, after you’re doing $100k+ in revenue, your business is worth not losing if somebody decides to sue you.

#10

Thanks Patrick - good stuff.

Incorporation - we might as well go ahead and cover this since it falls under basically the same premise as the insurance question which is how to most reasonably protect yourself legally / financially.

Thing is - in addition to the few hundred to incorporate, you also have to pay additional taxes every year. I remember there being some kind of $800 additional fee or minimum or something that I had to pay when I had incorporated a few years back for a separate business.

Then you also have to pay your accountant several hundred more dollars per year to file those taxes.

And then you also have a bunch of stuff to do for corporate compliance such as meeting minutes and stuff. And from my understanding, if you make any kind of mistake with all of the compliance, or if for example you comingle expenses even once, the corporate veil could be “pierced” as they say and you lose all the protection that you worked so hard to get yourself.

Obviously I’m not a lawyer and don’t really know much about all of this.

What bothers me is the uncertainty of knowing whether or not these measures (incorporation, insurance, etc.) are going to help if the worst case scenario were ever to play out.

In regard to liability, it’s good to know that it’s based off of revenue - in that case it probably won’t be much at all for me! And it’s also great to have a solid referral - that’s one of the main things I was looking for, b/c I’m sure that as you said 99.9% of the agents out there don’t know anything about software.

Those three major triggers are helpful rules of thumb, and I think I don’t fall under any of them currently.

But let’s say that I was over $100k in revenue. Here’s what I wonder. So let’s say you take out a $1m policy, and you’re in a B2B niche of some sort. Assuming that anyone would ever sue you for $1m in damages, it’s not hard to see how they could sue you for $2m. Figures add up quickly when it comes to businesses.

So then aren’t you right back where you started? Because the policy is only going to cover up to $1m and after that you’re going to end up having to foot the bill yourself somehow?

So I guess I see this as another instance where it feels very uncertain as to whether that $1m policy is really going to protect you completely.

And what about different kinds of insurance - like e&o vs. cyber liability vs. whatever. Who knows whether a given scenario would be covered or not.

I’m sure you’d probably just say - go talk to an agency already, that’s what they’re here for. But the problem is that I’d have a hard time trusting whatever an agent told me. They’re incentivized to basically scare you into buying insurance.

And if you ever were sued, you know that you’re going to be handed over to someone else and your agent is not going to be there to help you out. They’re just a sales person with a bit of knowledge in the field.

(That said, I’m really excited about that referral from Patrick b/c I’m sure that’s the best shot I’d have at getting as good of an agent as is possible).

Like I could very much imagine it being the case that if you were actually sued, you would realize that there are about 100 things that you would do completely differently next time around, and really the only way to ever know that is to just go through it.

For example, when I bought my first house - I tried to do a decent amount of research and had an agent to help advise with the decision. But at the end of the day, there are about 100 things that I would do completely differently if I were to buy a place again. Things that you just don’t really learn until you experience them for yourself and that an agent isn’t necessarily ever going to explain to you up front.


#11

We also have E&O insurance from day one. We found that going with a broker who specializes in IT companies can provide much better coverage for lower fees (if you are based in Germany and looking for E&O insurance, I’m happy to recommend our broker).

Besides revenue, the covered amount is also a big factor in our insurance policy. If you deal with a lot of enterprise customers who have insurance requirements as part of their standard PO terms, I’ve seen a minimum coverage of $1.000.000 for property damages quite a few times, so this could be a good starting point.

Also, if you are not based in the US or Canada but have a lot of customers there, insurance for revenue with US/Canadian customers can also be significantly more expensive. For us E&O costs 3 times as much per revenue for US/Canadian customers (I believe it has something to do with how liability lawsuits are much more expensive and likely to succeed there).

The tricky part is determining what part of your revenue is actually for services provided in the US/Canada. If you are selling software online or offer SaaS, then not all of your revenue with US/Canadian customers might be subject to the higher rates.


#12

$1,000,000 is plenty of coverage. You probably don’t make something that could cost someone provable liability to that level. Even if you do, you won’t have $1,000,000 worth of assets for a very long time. There’s no point in someone suing you for $10,000,000 when you only have $200,000. The coverage also covers lawyer fees which might be worth as much as the coverage itself.

Related, it’d be awfully rough to have something go wrong and get sued (or other issues) before you setup a business because then it’s you and your house and your dog they’re going to be going to first instead of the company. I don’t see the minor cost savings as outweighing the risks.


#13

Hi all,

Indeed, I think the issues of insurance and business entities are related. I’m a bootstrapper by nights and weekends, but during the weekdays I’m an estate planning attorney- part of my world of law is structuring ownership through the right types of entities. I thought I would add some thoughts from a US perspective that may or may not be helpful, with the understanding that This does not constitute actionable legal advice. I’m not addressing anyone’s specific circumstances. I am not your lawyer. I am not giving anyone individualized legal advice. No activity on this forum creates an attorney-client relationship. You should seek appropriate legal counsel Ok…now that this is out of the way.

It is important to note that, although insurance companies use revenue measures in calculating the cost of premiums, liability doesn’t depend on your revenue. Yes, the more you sell, the more exposure you are likely to have. But even if you only sell the first couple licenses, exposure to liability has already started.

If you set up shop without forming any formal business entity, you’ve opened up your entire personal wealth to liability. Let’s say you create a SaaS, which Ian will hate, that gives a business some sort of metrics about their mailing lists and costs $5/month. In month two (after which they’ve paid you $10 in revenue), the business makes some sort of large decision based on the information your product provided and your product turns out to be flawed. This business just lost $500,000 because of the decision it made based on your product and it decides to sue you for that full amount.

Let’s start by clarifying - someone can always sue you…it doesn’t mean they are going to win. Just a lawsuit alone, though, (even if you win) can put you out of business. So this customer sues you and is able to prove a case.

Because you are a sole proprieter (the default when you have no formal entity), you are personally liable for any debt of the company, including a judgement based on a case like described above. Now, the judgement is enforced and you lose your bank accounts, your house, your car, and perhaps a lot more.

If instead you form certain types of business entities, you may be able to limit the liability to the assets of your company. Traditional business structures such as corporations and LLCs, if properly formed, maintained, and managed, can limit the liability stemming from a business debt to your investment in the business. Sure, it would still suck, but now you are just losing your business bank account, the office chairs and pool table, and maybe your domain names (gasp!). But you still have your personal money, house, etc.

The costs of setting up and maintaining a formal business entity include the costs of formation, annual filing and possible franchise tax fees, having to maintain separate books and records from your personal assets and a few other things. This can be a pain. Most people think it really doesn’t matter what you do if you own all of the equity of the business, but even commingling business and personal accounts, having the business pay for personal expenses, not maintaining accurate records, etc., could allow someone suing you to “pierce the corporate veil” and argue that you shouldn’t be afforded the liability protection of a limited liability entity. However, it is a small price to pay for the protection afforded by a proper structure.

Now, which type of entity to choose is based on a number of factors and it is too big a topic for this thread. Typically, businesses in this space will use either a corporation or a limited liability company. What is clear, though, is that 1) you should not skimp out on the process and 2) you should seek the advice of an appropriate attorney. Neither incorporate.com nor even an accountant is qualified to walk you through the legal consequences of the choice of entity.

In the end, when we talk about insurance, the couple thousand dollars of setup cost and the money it takes to run the business each year is really worthwhile when you consider the protection it can afford you.


#14

@madshadow, thanks man good stuff.

Is there some way of estimating the maximum amount that you could be sued for, based upon the type of business you’re in and the type of customers you have?

For example, in my case, it’s an ecommerce plugin - few thousand MRR currently. Let’s say for example a customer was in the $10M yearly revenue ballpark.

Part of the reason I’m less concerned about incorporation is that I don’t have much in the way of personal assets to worry about (hopefully not for long!).

@ian this basically boils down to - people will only sue you if there’s enough to go after.

So by that logic, if you have less than $50k in assets, wouldn’t you be better off without additional insurance? Because without the insurance, there’s nothing for them to go after in the first place.


#15

@kalenjordan I think the key is that there is no maximum you could be sued for. You are alluding to estimating some estimate of exposure based on revenue and industry…that’s what underlies the calculation of the insurance premium. There may be companies that specialize in providing actuarial data on various risk factors applicable to your business; generally, though, the coverage amount suggested by an insurance broker and the associate premium are probably the best measures you are going to get.

Also, as several people have pointed out, someone is unlikely to sue you if you don’t have any assets. However, I would say there are two points to keep in mind. 1) You’ve spent more hours, blood and sweat on your business than you can describe- if it all goes poof when you could have paid a couple thousand dollars a year to prevent that, you might have regret. 2) Even if you have no assets personally and so aren’t worried about formalizing a business structure, there is still some pretty heavy potential fallout. I’ve seen many situations where individuals get sued based on business dealings and end up declaring bankruptcy. While you may have no assets to lose, having filed for bankruptcy is a tough scarlet letter to erase and can impact your future prospects for credit, jobs, professional certifications, etc.


#16

I get the risk. Really, I do. It’s the reason I’m spending time looking into this.

Regarding the premium / coverage limit, you’re basically suggesting that I do what the sales person tells me to do and take their word for it?

Not too comfortable with that idea. It would be nice to have some kind of data on at least how accurately a given agent has estimated coverage limits historically based upon actual claims for their previous clients.


#17

@kalenjordan No, you should definitely be skeptical of any salesman, particularly an insurance salesman. I think it is a difficult thing because, as you point out, there isn’t a lot of information readily available. Personally, I haven’t gone through the process of obtaining this kind of insurance. I suppose you might start by trying to find a good insurance agent with this kind of expertise through word of mouth. Whatever information you can get from him or her, together with a good dose of skepticism, may be the best start.

Please keep us posted as you go through the process. I’d be curious to hear what you find.


#18

Certainly the business entity is most important. After that the insurance. I mean, I suppose you could look at it that way, but I don’t. I’d rather have some form of first line of defense. I’m under no illusions that the insurance company won’t try and find some way out or protecting me if they can :slight_smile: but still for a few thousand dollars it’s some additional protection at a modest cost.


#19

@kalenjordan - when I was doing more web development & consulting work (including a business partner + 2 employees) we kept an E&O policy from http://www.techinsurance.com . That cost us about $850/yr, and we had to send them a 5-page form every year, to describe the size of the company & types of work we were doing. Quite worth it, I thought. I also carry a general business policy (covers general loss and theft stuff) for about $400/yr.

I’d also get going on an LLC right away.


#20

WRT incorporation, it’s hard to read the descriptions of ‘piercing the corporate veil’ and think I’d be able to appear sufficiently separate from my corporation for my personal assets to not be up for grabs.

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