Do I need insurance for my web business?

July 12, 2009 10:47 PM

Do I need to insure my web business? I am setting up a to-do list + calendar web application that holds users' data. Do I need to insure against data loss, or down time? Or can I put all that in a EULA (e.g., [web application] will not be responsible for any data loss, down time, data corruption etc)?

I plan to speak to a lawyer in about two months time about all the legal requirements prior to my web application "going live", but I want to get a bit of a feel of the risks associated before speaking to a lawyer and forking over $1000s or more.

If I do need insurance for my web app, what's the best way of finding insurance? (I've never looked at finding insurance before...my housemates have always taken care of home and contents insurance, and I've never owned a car). If insurance does exist for data loss etc, what's the ball-park figure on how much such a scheme would cost? Would I need to go with an multinational insurer, since the site will be available world-wide? Or would a small local insurer do (I live in Melbourne, Australia)? Or can I simply have an End User License Agreement and make my users agree not to sue me if I accidently lose their data. I know, even to this day, that Hotmail deletes user accounts if left idle for a few months....

posted by tomargue to technology (7 comments total)

I don't think such a thing exists. If people are worried about data loss, they pay for backups, not insurance.
posted by delmoi at 10:50 PM on July 12

Yeah, interesting, delmoi...I just spoke to someone in the Victoria's Small Business Department and she was unaware of any insurance that would cover data loss, and that I should be looking into getting a lawyer to write terms and conditions for the site or write it myself, and get a solicitor to check.
posted by tomargue at 11:03 PM on July 12

You can obtain Business Continuation insurance, which pays you (and through you, perhaps, your customers), for loss of access to premises and equipment caused by various kinds of physical damage, and is intended to provide funding for rental of alternate premises and equipment needed to maintain business continuity in the event of various disaster situations. This is usually combined with a fire insurance policy, and basic liability coverage. On top of that, depending on your business form of organization, you might want to obtain Professional Errors and Omissions coverage, to protect you from claims by your customers of loss due to your professional misconduct or oversights in programming and operating your Web business.

The scope of your activities in Web hosting will be a primary determinant in how you must insure. IANAL, but I think you will discover that, as you broaden your hosting base, to move your applications "closer" to your customers, for performance reasons, that your liability for losses begins to be subject to the laws of countries where your Web hosting resources are physically located. Thus, Microsoft will rollout a Euro version of Windows 7, without an integral Internet Explorer component, to meet the demands of European court settlements it has over previous IE market share and monopoly litigation. But here in the U.S., Windows 7 will include IE, and there will be no option for de-installing IE on U.S. version software.

In the same way, if you move some of your Web hosting to European datacenters to improve performance for your European customers, expect to be beholden to European courts in matters of liability. And be aware that some hosting arrangements will dynamically move your application to data centers around the world, to maximize efficiency under user load, with further potential for complicating your liability issues.
posted by paulsc at 11:55 PM on July 12

In your terms of service and service level agreements, you'll write in language to hold harmless and indemnify you and your company from all lost revenue, etc, etc, etc, that may occur due to an interruption of service, but that a prorated refund for the service amount may be offered proportionate to the amount of downtime.

Consider: If Rackspace, a leading dedicated hosting provider, can go down, costing their customers literally MILLIONS of dollars in lost potential revenue, and all they have to do (under their terms/SLA) is refund for the downtime, likewise.

You'll need insurance just to protect against any lawsuits, but a strong indemnification clause and well-written SLA will protect you rather well.
posted by disillusioned at 12:30 AM on July 13

Perhaps a little off topic here, but is your business a formal entity? In other words, a Corporation or Limited Liability or another such entity appropriate for your domicile?

Business entities are essential to separate your personal activities and assets from your businesses activities and assets.

Without such an entity in place, any liability may and probably will be directed at you, not the business. An appropriate entity would, misconduct or criminal activity aside, shield yourself from such claims.

As folks upthread have mentioned, performance insurance would indemnify your business, but if a entity hasn't been formally established then in theory you could be held accountable for any losses not covered by a policy in force.
posted by Mutant at 3:36 AM on July 13

As paulsc says, there is business interuption insurance that could cover IT related issues, but I suspect in this case it would either be way to expensive, if the issuer understood the risks, or be very restrictive e.g covering loss by fire, flood etc.
You can also get professional indemnity insurance to cover you screwing up, again under certain conditions. As I understand it, a click through EULA is not adequate for you to indemnify yourself against this kind of action. In any case, if you screw up significantly someone may well sue you regardless, and you would then have the legal fees to deal with.
I think some better questions to ask are:
- what am I insuring against? Assuming you intend to run this business as a limited company, in most circumstances a customer can't come after your personal assets. If you aren't incorporating (costs about $1000p.a for an AU PTY LTD shelf company and minimum filings) why not?
- If you want to test the waters and see if the business is successful before spending on lawyers etc. I can certainly understand that, so I would suggest you might want to just go ahead and see. If the business is wildly successful, pay advisors to sort this out. If it isn't, nothing lost.
- If for some reason you really do want insurance at this early stage, you need to talk to an insurance broker. The yellow pages lists them, and they will be able to advise if a policy exists that does what you want, or in some cases be able to work with an insurer to have one created.
That said, I think way too many entrepreneurs get stuck with details like this too early in their business's lives, and it stops them being successful. The successful guys I know tried stuff and worried about the details if it was a hit, rather than dotting all the i's and crossing all the t's first.
posted by bystander at 3:50 AM on July 13

Yup, I've incorporated a proprietry limited company in Australia.

Thanks, all for your comments.

I think way too many entrepreneurs get stuck with details like this too early in their business's lives, and it stops them being successful. The successful guys I know tried stuff and worried about the details if it was a hit, rather than dotting all the i's and crossing all the t's first.

Yeah, this is a good point.

Okay, cool stuff, I think I'll delay the sorting of my insurance (or put it lower in my priorities) until I get some users on board, and I can see how my site's being used etc.

Cool stuff, thanks everyone for your answers!
posted by tomargue at 10:55 PM on July 15