What Startups Need To Know About Insurance

Surviving and thriving can be a monumental task for most startups. About 90% of startups fail in the first year. And it’s not hard to see why it’s so difficult. Most startup founders want to bring real innovation and disruption to their respective industries. This vision is both noble and challenging to pull off – startups are faced with a huge amount of challenges and risks right from the get-go. Liability claims, damage to their property, the risk of cyber-attacks and data breaches, employment issues, and contract disputes are all common and potentially incredibly costly risks. 

Having the right risk management program in place will allow young and mature startups to mitigate the financial impact of these risks and avoid potentially catastrophic losses. The key aspect of a risk management program is investing in insurance. 

However, it can be very difficult to dedicate the time and resources to securing the right insurance coverage. In fact, a lot of startup founders incorrectly view insurance as a luxury product and not an absolute necessity. Nothing could be further from the truth. 

The right insurance policy can mean the difference between a costly claim forcing you to close down your business or being a simple inconvenience. Using insurance to transfer the cost of these risks to the insurance provider can help startup founders make decisions confidently, without worrying about a bad move killing the business. It will also make the startup more attractive to partners and investors, who will appreciate that your leadership has the foresight to focus on managing the potential risks.

Investing in the right insurance products that will ensure that your employees and leadership are protected from personally being responsible for the outcomes of their decisions and actions will help attract top-tier talent. This means that almost any business, no matter how big or small, that wants to ensure sustainable growth should look into securing the right coverage.

Let’s breakdown what insurance policies startups need to throughout their growth stages and how they can ensure that they are properly protected: 

Insurance for Seed Stage Startups Before They Get Customers 

General Liability & Property/BOP (Business Owner Policy): These are basic policies that most small businesses will need to secure. Property insurance will protect your assets, such as your building and its contents (computers, office furniture, etc.), from potential losses. General liability will cover your legal expenses and settlements if you are held liable for bodily injury and property damage to others if they happen on your property. These two policies are typically bundled together in a BOP policy to ensure that you have no exposures and pay less for insurance. 

Workers’ Compensation: Workers’ comp will cover the medical bills and lost wages if your employees are hurt on the job. All states, with a notable exception of Texas, will require you to carry this insurance. However, since startups typically operate in very safe environments (i.e., office or working from home), they won’t have a huge premium for the right coverage. 

Insurance for Seed Stage Startups That Already Have Customers

Errors & Omissions (E&O) Insurance: Any startup that provides professional services to clients needs to invest in E&O insurance. It’s important to note that software products are also considered services from a legal standpoint, meaning that many tech companies will also need it. E&O will protect the company from claims that your services lead to financial damages to third parties, paying for both your legal expenses and the cost of settlements/damages.

Cyber Liability Insurance: A preferred cyber policy will protect your company from data breaches and cyberattacks. Startups typically rely on technology to innovate their industries, and as a consequence, are very vulnerable to cybercrime. The right policy will cover both settlement and legal costs that stem from liability lawsuits. Additionally, computer forensics, victim notification costs, and PR handling will also be included.

Insurance for Startups That Have Raised Capital

Directors & Officers (D&O): All funding agreements will stipulate that the startup secures D&O coverage. Most VCs will serve on the startup’s board of directors, and they want to know that their assets are secure. D&O will protect the company and your leadership’s personal assets from lawsuits alleging breach of fiduciary duty, misrepresentation, or errors.

Employment Practices Liability (EPLI): Startups that hire employees need to think about employment-related claims and lawsuits. The more employees you have, the more you’ll need a strong EPLI coverage. The policy will protect the company from claims such as discrimination, harassment, and wrongful termination. Additionally, if you’re employees contact with your clients and customers, you can include coverage for harassment or discrimination to third parties. 

Fiduciary Liability: As soon as you implement employee benefits, you will have a fiduciary responsibility to best manage their packages. The right fiduciary policy will protect your business if you’re held liable for claims of mismanaging any employee benefit plans, such as 401(k) plans or health benefits. 

Key Person Insurance: Key person insurance is, simply put, a life insurance policy taken out on a critical team member, founder, or partner. Key person insurance will help your startup weather the losses stemming from a key contributor’s death or disability. The insurance will pay for both losses of revenue and replacement costs to ensure that such a tragic situation doesn’t badly damage your startup. 

Written by Callum Jackson