Why Business Insurance Is Hard for Life Science Startups
A guide to Life Science insurance challenges, and how to get covered efficiently and affordably.
It’s not just you. Insuring a Life Science startup, traditionally, has been a tough task. The threats are unique, complicated and evolving. They change substantially as the company progresses through the stages of commercializing a product – as opposed to typical tech companies where the risks tend to appear early and simply increase in size as the company scales.
Because of this complexity, writing policies is time consuming and expensive for legacy insurers and brokers, so they tend to avoid startups and focus on larger enterprises where the premiums are more attractive. To make matters worse, if a startup can even get coverage, they are often subject to a minimum premium that is prohibitively expensive.
Here’s an example of what can go wrong when an insurer doesn’t fully understand the risk profile of a Life Science startup. Say that you have a pharmaceutical startup and your company procures the necessary coverages through a traditional insurance company, which may include a general liability policy, protection against spoilage, intellectual property theft, a cyber policy to protect PHI, and a policy to protect against occupational injuries. However, your insurance company fails to fully understand and forecast your startup’s evolution throughout milestones and did not recommend a clinical trial liability policy. Because you don’t have clinical trial coverage, the trial is delayed, resulting in unexpected costs and a tough conversation with your board.
As another example, let's say your insurer fails to recommend protection against product recalls once your product reaches commercialization. If a product recall occurs, the costs really add up. They can include the advertising and customer outreach expenses, the cost of shipping and proper disposal of the product, and cost of unused/unsold product and product packaging and marketing material.
Both of these examples can result in hundreds of thousands, or even millions of dollars in losses – all of which could have been protected if you had partnered with a life science insurer that anticipated those risks.
Given the many pitfalls, how does a Life Science startup get insurance right from R&D to product commercialization? It starts with an insurance company that understands the unique, evolving needs of insurance for Life Science startups. Vouch talked to Life Science founders to understand their pain points with insurance and designed our products and service model to make an insurance program that aligns with the highly specific needs of Life Science startups. Here are the issues we see with insurance for this category and how we’ve fixed it.
Legacy Insurance Is Focused on Large Life Science Companies, Not Startups
Legacy insurance companies are focused on larger, more established firms and are generally not designed for startups.
First, if your startup is not yet producing revenue, it may be a challenge to even procure insurance from a legacy insurance company. This is because their underwriting formulas are designed for larger businesses, so they struggle to understand the risk profile of smaller companies.
Also, legacy companies have yearly premium goals to meet, which means that your account is unlikely to receive the attention it demands. For example, say that the underwriter of a legacy company has a premium goal of $2 million to meet. The underwriter is going to focus on larger clients, not startups, to meet his or her premium goal.
In addition, the legacy insurance procurement process is lengthy and may take several weeks to complete. In a fast-paced startup environment, this is far too long.
Vouch succeeds at supporting small startups, like yours, when others can’t or won’t. First, we utilize technology to automate expensive processes. Second, we have proprietary underwriting data around startups and the coverages are underwritten by a coalition of top carriers and reinsurers. But most importantly, our business model is based on securing coverage early and scaling with your startup as you grow, with the ability to adjust insurance limits at any time.
Many Brokers That Work with Startups Aren’t Fluent in Life Sciences
You are a scientist, not a risk expert. You lean on your broker for insurance guidance, but when your broker isn’t an industry expert in Life Sciences, it can spiral into problems. For example, he or she may not be experienced enough to recommend the specific policies your startup needs based on your unique exposures and your current stage.
In comparison, at Vouch, our Life Sciences insurance products are overseen by an experienced industry expert and dedicated Life Sciences underwriting team. The coverages have been designed from the ground up to meet the precise needs of Life Sciences startups as they move through milestones. Life Sciences Insurance Advisors are trained in risk management best practices for this industry and can explain the types of policies best suited for your startup, including specialized add-ons.
Here’s an example of a common “gotcha” that our Insurance Advisors identified for clients when reviewing prior coverage. Our Life Sciences experts know that once you reach the milestone of product commercialization, and your product has been approved by the FDA, that a condemnation of undamaged stock policy is necessary. Without it, if a fire breaks out in the building and damages the packaging (but not the product itself), the product liability insurance will not be triggered – yet the FDA will condemn the product since the packaging is damaged. Without the product condemnation policy, your startup could face a substantial loss.
As another example, post-COVID, there has been a surge in startups that use digital platforms to dispense medical advice. But what happens if an error in the platform gives a patient advice that ends up being harmful to them? Since there is no individual physician dispensing this advice, where is this mistake covered from an insurance policy standpoint? This is why we created specific endorsements to our errors and omissions (E&O) policies to extend coverage to bodily injuries resulting from an error in the software itself. Bodily injury would be unusual to cover in a standard Tech E&O policy, but for a digital health company, it just makes sense.
Life Science Is Easy to Under-Insure and Over-Insure
There are risks involved in getting insurance right, including under or over-insuring. It is relatively easy to go to a Life Science insurer and pay the minimum premium for a large limit policy that isn’t tailored to your risks and wastes financial resources. However, it is equally easy to be under-insured when working with a broker and obtaining a general liability and property policy that may contain exclusions. This situation leaves you with minimal protection against a very basic subset of risks that are universal to running a business, like an injury from tripping and facilities damage from fires, and is not specific to the unique risks of a Life Sciences startup.
With Vouch, you can easily update coverage anytime, not just at renewal. Our Insurance Advisors are proactive in ensuring you are properly insured before, during and after each milestone.
Below are the growth stages of a life science company and the additional coverages required at each stage:
Early Stage / R&D
- Goods subject to spoilage - Reimburses businesses when temperature emergences ruin perishable items
- Critical scientific data - Protects against data loss or theft and associated litigation expenses
- Intellectual property - Covers litigation costs related to the enforcement or defense of patents, trademarks or copyrights and can also protect against patent infringement claims
- Occupational injury - Provides both employees and employers with protection against losses associated with on-the-job accidents
- Limited hired/non-owned auto liability - Provides coverage for a business that is sued due to an accident involving a borrowed, rented, hired or leased vehicle
- Human clinical trial liability - Coverage for the complex risks facing the clinical trial process
- Business Interruption - Supplements a business’s income when the business cannot operate due to a covered loss
- Product and services liability - Protects against claims that a product you made or sold caused bodily injury or property damage
- Product recall - Reimburses for losses associated with a product recall
- Reputational injury - Reimburses the net profit lost as a direct result of adverse publicity
- Contingent business interruption & supply chain - Covers lost revenue caused by a third-party shutdown (or supply chain barrier) that directly impacts the company’s ability to do business
- Other tailored additions (optional)
- Errors & Omissions - Protects against lawsuits claiming a mistake was made in professional services which can help cover court costs and settlements
- Product condemnation - Covers products that have not been physically damaged but have been condemned by a government authority
As you can see, failing to transition to new coverages as the company also transitions to new stages leads to exposure when the appropriate coverages aren’t secured.
What Makes Vouch the Right Insurance, Right Now
Insuring your Life Science startup doesn’t have to be so hard. We know you operate in a rapidly changing, highly-regulated field with risks specific to working in a laboratory setting. Our experts have a passion for the entrepreneurial and scientific spirit behind Life Science startups, so we’ve engineered a suite of customizable coverages designed for your needs. Most importantly, at Vouch we understand the milestones and stages of Life Sciences startups and our experienced underwriters and Insurance Advisors are with you as you grow.
Want to see the difference? This infographic demonstrates how Vouch compares to legacy insurance companies in terms of procurement, ease, timeliness, pricing and expertise.
In summary, as you move along your startup journey, your risks will evolve and stakeholders will change. Vouch ensures you stay ahead of new risks with access to the appropriate coverages and specialists to insure your Life Sciences startup as you scale.