Investors turn to insurance for portfolio company risk transfer

David Dickson
Director, Advisory
15 February 2023
4 minute read

Insurance is an undeniably important aspect of managing a company’s risks, but it’s often an afterthought for early stage businesses - with cover left trailing behind as a business grows, leaving it exposed to different and more complex risks.

As an investor, it goes without saying that your portfolio companies’ risks are automatically yours too. And when you invest capital, it’s intended to enable the business to grow rather than pay for their errors, liabilities and losses. For this reason, it’s important that you take an active role in ensuring that they’re properly protected with the right cover.

At SuperscriptQ, we work with Venture Capital, Private Equity and angel investors to secure the right cover for their tech portfolio companies. Below, we explore the risks tech businesses are likely to face today and highlight some of the covers designed to match these risks. Many investors require that the risks listed below are covered as a precondition of investment and we would encourage you to consider doing the same.

Insurable risks faced by tech businesses

Management liability

Customers and employees are usually a business’ most important asset, but they also present significant risk. From alleged mismanagement, to alleged discrimination, to wrongful termination, plenty can - and unfortunately often does - go wrong. Fortunately, there is cover available to protect against these risks.

Directors’ and Officers’ insurance is one such cover which we strongly encourage investors to require of portfolio companies, as directors’ and officers’ personal assets are otherwise at risk, as well as the liquidity of the company generally. Note that if you are a board member, your personal assets are also potentially liable. This is a strong driver of why so many investors require their portfolio companies to purchase the cover.

An important person leaving the business

If a critical employee or founder cannot continue their work due to critical or terminal illness, or death, this can leave a business in a difficult situation, both in terms of knowledge and financial loss.

Key person insurance is designed to provide a death benefit or income replacement to the business if a key employee is lost due to the reasons above, giving the business the financial strength to continue.

A cyberattack or security breach

Data breaches, hacking and ransomware can cause devastating havoc to a business.

Cyber insurance provides coverage for costs associated with responding to a breach, such as legal fees, notification expenses, and credit monitoring services for affected customers, as well as any business interruption costs and access to extortion experts. This helps to mitigate the financial impact of a cyber event and protects the business and its investors.

Mistakes or breach of contract

Technology businesses may face potential lawsuits for (any actual or alleged) professional error, omission or negligence, or even a breach of contract.

Professional liability insurance can provide coverage for legal fees and damages related to these types of claims, and insurers have a duty to defend their policyholders.

Product risks

Technology companies that develop and sell physical products can face potential lawsuits for product defects or malfunctions, especially if they result in bodily injury (including mental anguish) or property damage.

Product liability insurance can protect the company and its investors from the financial consequences of such lawsuits.

Intellectual property risks

Technology businesses may face legal battles over intellectual property rights, such as patents, trademarks, or copyrights.

Intellectual property insurance can provide coverage for legal fees and damages related to these types of disputes, whilst also (if abatement coverage is purchased) provide a business with the financial ability to pursue action against another business for alleged infringement of their own IP.

Reputational risks

Negative publicity can have a significant impact on the reputation and success of a technology business.

Reputational damage insurance can be purchased as a standalone product, or as part of a wider cyber product, and can provide financial protection in the event of a crisis, such as a product recall or a data breach.

Regulatory noncompliance

Certain industries and businesses may be required by law to carry insurance coverage, such as employers’ liability insurance for companies with employees, or professional indemnity for various regulated businesses. Failing to comply with these requirements can result in legal consequences, including substantial fines or lawsuits.

The above is not an exhaustive list of risks, and the combination and level of covers will vary greatly from business to business, depending on its risk profile. This is why it’s so important to work with a broker that is able to support investors and portfolio companies at every size and stage.

At SuperscriptQ, we specialise in this. Our approach is collaborative, starting with an in-depth assessment of the risks your portfolio companies face, coupled with establishing how you, as the investor, want to minimise these risks. This enables us to accurately advise each portfolio company of best practice in terms of risk transfer, whilst ensuring that they have an appraised decision about their insurance purchase.

This content has been created for general information purposes and should not be taken as formal advice. Read our full disclaimer.

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