In the world of insurance, there's something SaaS and other multi-tenant solution providers should consider before accepting Additional Insured endorsement requirements for their liability insurance policies.
What Are "On-Premises Insurance Contracting Principles"?
Before the advent of cloud computing, services were typically performed on-site, or "on-premises." Companies delivering these services carried general liability insurance to protect against property damage and personal injury. Often, these policies included an option for an "additional insured endorsement," allowing a third party, like a client, to also be protected under the insurance policy. Savvy clients would require this coverage as part of their contracts, and contractors generally had no issue complying, as they could factor the cost of the endorsement into their service fees.
This model works well in the context of on-premises work, where services are tied to discrete projects. A contractor is on-site for a specific project, completes it, and then moves on. The risk of an additional insured making a claim on the contractor’s insurance increases only with the number of projects in progress at any given time.
The SaaS and Multi-Tenant Context
This premise, however, does not hold when offering SaaS and multi-tenant solutions, which are not project-based. Instead of moving from one client to the next, a SaaS provider delivers services to all clients simultaneously.
Consider this scenario: You have a $10 million liability policy, and a claim event occurs.
For a traditional contractor, this might mean paying a deductible and possibly purchasing replacement insurance for the next job. If a client needs to make a $1 million claim, it’s manageable.
But if you're a SaaS provider, the situation is different. If you have 10 clients named as additional insureds and each makes a $1 million claim, you’ve exhausted your insurance coverage. This may leave you uninsured against further claims and relying on cash reserves to cover additional losses.
What About Insurance Brokers?
Shouldn’t your insurance broker address this? Maybe. However, there's often a critical distinction that’s overlooked: just because you can name a client as an additional insured doesn’t mean you should.
While contractors might easily grant a client an additional insured endorsement, sophisticated SaaS vendors—and their buyers—understand that the nature of the service might make this impractical.
The Bottom Line?
You can help protect your SaaS business from excessive liability insurance claims by:
Checking your insurance limits and policies to make sure you have sufficient liability coverage;
Reviewing your contracts to make sure your business isn't unnecessarily agreeing to name customers as additional insureds; and
Making sure your insurance policy endorsements are up to date and align with your contractual obligations.
Your commercial counsel and/or risk manager can help you avoid taking on unnecessary risk and ensure that your contractual obligations align with the realities of the service you’re providing or purchasing.
Out-House Attorneys, LLC. doesn't just review and redline contracts - we align the terms with every client's unique operations and risk tolerance. Contact us today to enjoy commercial legal guidance you can count on.
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