Insurance for Internet of Things Companies

Insurance for Internet of Things Companies — what you need to know

The Internet of Things space is exploding right now and shows no signs of slowing down.  In fact, some sources estimate that there will be 200 billion connected devices on the planet by 2020.  The current global market size is estimated at $4.9 trillion and expected to reach close to $9 trillion by 2020.

This paradigm shift and the incredible internet of things startups that are pushing it will revolutionize our lives.  Many already are!  From connected devices that monitor and control indoor air flow with machine learning to those that monitor and correct our driving skills (just for 2 examples), IoT companies are making the world a better, more efficient, safer place.

We’ve had the opportunity to work with several internet of things startups and really learn the pain points that these companies face from a liability risk mitigation standpoint.  Simply obtaining proper insurance for internet of things companies can have its challenges too.  Here’s where IoT companies should consider and re-evaluate their insurance coverage at various points in their life cycle:

1. Pre-launch

Though you’re pre-launch, there’s a pretty good chance that you have an office space.  This triggers a need to get some basic business insurance in the form of a “Business Owner’s Policy” (“BOP”).  These policies include general liability insurance claims and coverage for your own business property.  Technically as soon as you start operating the business there’s a chance to inflict bodily injury or property damage on a 3rd party.  Maybe a client visits your office only to slip and fall on a spill.  Maybe you accidentally break an expensive piece of equipment when visiting a potential manufacturing partner.  This is classic general liability territory.  Beyond the actual risk mitigation factor, all landlords will require you to carry GL and you should keep an eye out for those terms in your lease.

You may not have a product on the market yet but you certainly act like you do.  The “fake it ’til you make it” mantra rings true through the startup community and the IoT space is no different.  Nearly everyone will throw up a splash page to capture the contact info of future customers well before the launch.  It’s not uncommon to showcase a demo video as well.

These actions should get you thinking about cyber liability insurance.  Believe or not, in some states a full name and email address counts as “Personally Identifiable Information,” or “PII.” The breach of any PII triggers notification requirements that also vary by state and with which it can be costly to comply.  These added costs could really kill momentum.   General liability is usually a larger concern at this pont, but while this scenario isn’t likely, it can happen (and has happened).

2. Product in the market

Here’s where things start to get a bit more serious, particularly on the general liability front.  Here’s why:

• When the product is in the hands of the consumer, he or she can be injured directly by the product (rather than, say, slipping and falling in the company’s office).  This requires “products liability” coverage, a sublimit contained within a GL policy.
• The company will become the de facto “manufacturer” of the product if a) selling the product under its own label or b) the contracted manufacturer is not based in the US.  Manufacturers are seriously exposed to lawsuits for defective products.
• Products liability coverage is consistently excluded from the basic business insurance policy that companies need pre-launch when a manufacturing risk is present.

Due to these factors, it’s necessary for Internet of Things companies obtain a standalone products liability insurance.  The BOP policy from pre-launch will almost certainly not be willing to include this risk in the coverage for the reason stated above.  The combination of the BOP insurance and the products liability insurance will ensure that all GL/Property risks are covered at this stage.

If not in place already, this is also the time to obtain an Errors and Omissions and Cyber Liability policy.  A good errors and omissions insurance policy (“E&O”) covers a wide range of “professional” mistakes the company can make.  This can include claims from vendors that the company didn’t perform as promised or claims for losses sustained by customers/venders due to glitches in the product itself.  Imagine if Nest malfunctioned and jacked up the heat in someone’s home, causing their energy bill to skyrocket.  This would be an example of a glitch giving rise to an E&O claim.

Cyber liability also becomes more important at this point.  If all goes well, the company will be acquiring tons of new customers/users post-launch.  As more customer data is collected and the company gains more traction, there’s greater risk of data leaks, whether malicious or accidental.  There are some great providers in this space that offer comprehensive E&O/Cyber packages that cover both service-based and glitch-based claims.  This makes securing E&O/Cyber insurance for internet of things companies fairly stress-free.

3. Raising institutional capital

Back when the company was pre-launch, there was a chance that the your landlord contractually required a GL policy.  Here’s another moment in time where insurance will be contractually required.  Institutional investors typically require portfolio companies to carry two different kinds of insurance: directors and officers insurance (“D&O”) and key man life insurance.

D&O insurance is designed to cover the personal assets of directors and officers when sued for an action taken in their role as director or officer.  Your institutional investors will almost always require a board seat, and therefore they’ll almost always require D&O insurance to make sure they’re personally covered.  D&O insurance shouldn’t be perceived as just a pesky requirement though.  Remember: it covers ALL directors and officers, so founders clearly reap the benefits of D&O coverage as well.

Key man life insurance is essentially a life insurance policy that pays out to the company.  Investors require key man life insurance because they’re typically betting on the core team rather than the idea in its current iterations.  This is particularly true of bigger Seed and Series A rounds.  If the unthinkable happened and a core team member was fatally injured, it could seriously derail the progress of the company.  The replacement process alone could take months to complete, causing development delays and giving competitors an edge.   Key man life insurance will pay a lump sum to the company in order to keep things on track.

While D&O and key man policies typically come into the picture when a term sheet is on the table, there’s no reason to think they’re not valuable sooner.  These two should also be considered as the company picks up momentum and really starts to gain traction.

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