Why Insurance Companies Are Afraid of Social Media Companies
If you are running a social media company, large or small, and have had to buy an insurance policy you have most likely encountered significant difficulty and pushback when trying to get even the most basic coverage. Why? Pretty simple - insurance companies, like all companies, are in business to make a profit. And many of them view the risks presented by social media to be too great to make a profit from. If you were any other small, office-based startup in NYC you would most likely be looking at a basic General Liability policy running you somewhere in the neighborhood of $150 per month. For that, the insurer would provide you with one million dollars of liability coverage (available for defense costs and settlements). And in most cases there will never be a claim on that policy. For social media companies, however, insurers feel the risk of claims is exponentially higher - such that they could not even charge enough to offset the claim potential. Therefore many will typically just pass on offering a quote or coverage. Here is what they are thinking:
At their core, General Liability (GL) policies exist to cover claims that your company, it's people or it's products & services caused Bodily Injury or Property Damage to a third party. For most companies in an office environment that scenario is rather unlikely. Sure someone could slip and fall while on your premises, but those situations are fairly rare. As a social media company the risk of a bodily injury claim is slightly different. Take the "cyberstalking" scenario: two people meet online in a social network, agree to meet in person and one of the people physically assaults the other. Was it the fault of the social network platform? Probably not. Will they get sued? Probably. In the end there are defenses to justify why the social network is not responsible - but that may be after tens or hundreds of thousands of dollars in defense costs. Insurers may say that their General Liability policies do not intend to pick up that "contingent" bodily injury, only direct bodily injury caused by you - but they also know covering this type of claim may be unavoidable. So the easiest thing for them to do is not take a chance in the first place.
IP, PI & the Big P
GL policies have a few other components that are important to note: they also cover Advertising Injury and Personal Injury (AI&PI). This is big. AI covers claims for things like false advertising and copyright/trademark infringement. PI covers claims such as libel, slander, defamation, privacy, etc. Once again think about your average small office-based business. They might have a website but it doesn’t generate any income, no one advertises on it. Their likelihood of a false advertising claim is negligible. And they don't really have the potential to infringe on another company or individual's intellectual property. On the PI side, could they defame or disparage someone, say at a cocktail party, and then be sued? Sure they could - although this, too, is a remote possibility. Social media companies on the other hand have robust web platforms where users control the majority of the content. This opens Pandora's Box of risks for personal injury, copyright infringement (think: posting videos, music or other copyright protected material)…the social media platform becomes the unfiltered megaphone anyone and everyone. Is this OK? Aren't we operating under a Constitution that provides freedom of speech?? Of course we are - insurers just don't want to bankroll the litigation that often accompanies new avenues of communication. Especially not for fifteen-hundred bucks a year. Finally: privacy. Possibly the biggest risk facing social media companies and their insurers is the potential for a massive privacy claim. This can come from a security breach that results in unauthorized access to personally identifiable information or credit cards. Or, as Facebook recently discovered, sharing your user's data in an open infrastructure brings with it the potential for a privacy violation.
As social media evolves and companies work out the best ways to monetize their platform, and thousands of loyal users, it often means selling a product. So let's just say that your social network is a platform to bring together like minded people in the skateboarding community. What better way to leverage the group buying power than to offer you’re your own name brand skateboards, helmets, ramps and other goodies?? Have I mentioned that your typical basic General Liability policy covers product liability? So now your 10 person "office operation" is selling products that may result is severe head trauma and death. You can substitute any product from q-tips to alcohol to children's apparel - if someone gets hurt using a product that you sold them you might be on the hook. And by you, I mean any insurance company that provides your General Liability coverage.
Perfect Storm of Risk
Believe it or not, there are probably four or five other significant reasons that most insurers are very skeptical about providing social media companies with a simple business owner's policy. While some companies may even have one small part of their business viewed as high risk, Social Media companies have the potential for high risk in just about every category. This is not a defense or justification for the insurer's unwillingness to provide coverage, but rather an explanation for perplexed execs at social media companies. Part of it has to do with the newness of this type of business - insurers have no track record to base their appraisal of the risk on. And frankly that's how the actuarial system works. In five years this may be a non-issue, as every company is evolving toward embracing social media. Insurers are just going to have to adapt and overhaul their underwriting philosophies. There are already some progressive insurance companies that think they have a handle on the risk today and are able to offer coverage at a reasonable cost. You just have to find them!
So what can you do?
Work with a broker that has experience with Social Media companies. They will know upfront which insurers will, and which will not, offer coverage for a company like yours. This alone could save you from the potential for lost time while an unfamiliar broker looks under rocks for something that isn't there. TechAssure is a national network of brokers that specialize in insurance for technology and digital media companies.
Don't wait until you have a client contract that requires you to get insurance. Start the process early so you don't end up in a mad scramble and risk losing revenue. This will also give you time to price out the best possible solution.