What Is Startup Business Insurance and Why Do I Need It?
In the fast-paced world of startups with ever-growing risk, having insurance in place can mean the difference.
Startup business insurance protects your company, investors, board, property, and customers from lawsuits. Think of insurance as an investment in your business designed to cover the financial cost of unforeseen liabilities and business losses. It is a way to help transfer the financial risks of running a competitive startup from you and your company to another entity. In the event that something does go wrong, you can file a claim, and your insurance provider takes it from there.
It’s a smart business move that signals to potential customers, investors, and board members that you take risk seriously. Many require insurance in place before they will work with you, which means having your insurance program ready ahead of time can speed up negotiations. In the fast-paced world of startups, that can mean the difference between making the deal or getting passed over for a more prepared competitor. This might explain why roughly two-thirds of repeat founders start purchasing insurance policies at the formation of their startups.
What Kind of Insurance Do I Need?
The best insurance coverage should be tailored to fit your company. As your business grows and evolves, so do your insurance needs. When you hit certain milestones, you’ll need different types of insurance.
Purchasing insurance in anticipation of these changes is an effective way to keep your company protected and running smoothly. For example, if you plan to release your product soon, it makes sense to have Errors & Omissions insurance in place before launch to help protect your company should there be any downtime that affects your customers and disrupts their business.
Here are some general coverages that many investors, financial institutions, landlords, or customers require before doing business with you:
- Directors and Officers
- Key Person
- Errors and Omissions
- Employment Practices Liability
- Workers’ Compensation
- General Liability
- Business Personal Property
What Is the First Insurance Policy I Should Buy?
General Liability Insurance is a good place to start. A General Liability policy pays out for injuries or damages that may occur at your office, and absorbs the cost of defending against or settling those claims.
Business Property Insurance is used to replace damaged or stolen office equipment. For example, if your employee’s laptop was stolen, Business Property Insurance can help you to replace it quickly.
What Insurance Should I Have Once I Start Hiring Employees?
While requirements vary widely, all 50 states require you to have Workers’ Compensation insurance in place to pay for on-the-job injuries. You should also have an Employment Practices Liability policy to fund your defense against legal action by employees, such as claims of wrongful termination or wage-disputes. If you are offering benefits, like a 401(k), you should have Fiduciary Liability Insurance in case an employee sues because they believe you and the company mishandled those funds.
Crime insurance covers the cost of a crime committed by an employee to your company. A few common use cases covered by this policy include: if an employee steals sensitive client data, embezzles money, or otherwise commits criminal acts related to your business.
How Do I Protect My Company from Product or Service Mishaps?
Once you begin selling your product or service, you should have Errors and Omissions (E&O) Insurance. If a customer believes that a bug in your software caused them to lose money, they can sue you for damages.
Cyber Insurance has many factors to consider. Common coverages include:
- Data breach coverage
- Privacy breach coverage
- Restoration costs
- Business interruption coverage
When looking at these types of coverage, it’s important to understand the difference between first party to third party coverages, as well as "sublimits." When purchasing a cyber policy, conduct an internal evaluation on how much customer information your company stores and what type of information is being stored so you can better understand your organization's biggest blind spots to ensure you’re covered.
What Is Directors & Officers Insurance?
Potential investors and board members will want to make sure their assets are protected from a stakeholders' claim of company mismanagement or claims for non-compliance to regulatory guidelines. In fact, many D&O lawsuits come from regulatory non-compliance. Directors & Officers (D&O) Insurance provides legal defense against covered claims. Without D&O in place, investors are reticent to invest in your company.
What if I Need More Coverage?
As a founder, you often know if you have unique risk exposures, whether you’re a D2C brand that needs coverage for inventory, or a frontier tech company that needs product liability coverage for your rocket or drone. An insurance advisor can answer your questions and help you get the unique coverage you need.
But What if I Did Nothing Wrong?
Whether or not a wrongful termination allegation or claim of corporate malfeasance is true, proving that in court can still be very costly. Additionally, if a competitor files a lawsuit, they’d rather see you scrambling to pay for an attorney than continuing to focus on providing a better product. Even if you take every cyber security measure possible, that doesn’t mean a hacker can’t compromise your system. No founder wants to use their fundraising dollars to pay out of pocket for these types of claims instead of investing in the growth of their company.
Is It Worth the Cost?
It’s easy to underestimate the financial impact of unforeseen events. Nearly 70% of small to medium business owners thought a cyberattack would cost them less than $25,000. The average cost of a breach was significantly higher: $149,000. In 2018, businesses with less than 100 employees suffered a median loss of $200,000 from fraud. Insurance transfers some of the financial risk of running a company from you to your insurer. It not only provides peace of mind to your customers, investors, employees, and board members, but allows you to accomplish what you set out to do: run an effective and competitive company.