Considering Insurance for Your Startup

Guest Blog | Andrija Suberic

Many startup owners incorrectly view insurance as a luxury and not a necessity. Working with brokers or advisers to create the right risk management program is often regarded as a tedious chore that can be left for later down the line in the company’s lifecycle.

However, this is a very risky approach to take. Property damage, cyber attacks, data breaches, product issues, discrimination, and harassment lawsuits are all possible and potentially costly risks startups could face at a moment’s notice.

Having the right insurance products in place will allow businesses to manage this myriad of unpredictable risks and avoid financial losses that could cripple them or even force them to shut their doors for good.

No two companies are the same, and different businesses will have different definitions of “the right” insurance products. There are several factors that determine your insurance needs and how much you’ll have to pay to be sufficiently protected. Typically these are:

• The nature of your product/service,

• The industry you’re serving (certain industries have higher risks associated with them),

• How much and what kind of property do you own/lease,

• The number of employees (more people means more lawsuits),

• Planned and projected growth,

• Your revenue.

To help you gain a deeper understanding of what your company may need, let’s break down the common risks startup owners can expect and what insurance policies would respond to those risks.

Common Risks Startups Face

Startups usually begin with an idea to revolutionize their prospective industries and the world we live in, and that makes them vulnerable to a unique set of risks. These are some of the most common risks startups face:

Liability Risks

Whether it’s your customers, employees, creditors, or others interacting with your business, your relationship with them can become litigious – even if you aren’t actually to blame. Even if it’s unfounded, having to defend from a lawsuit can represent a considerable drain on your financial resources.

Additionally, going to court is often a stressful, draining, and unpredictable experience. Protecting your company from potential third-party liability lawsuits with insurance is a crucial step in securing your peace of mind, as well as insulating it from the potentially disastrous financial cost of defense, damages, and settlements.

Lack of Market Need

Before starting your company, you need to do a thorough market analysis and see if there is a clear need for your product or service. The market is very crowded, and you need to find your spot by offering something innovative and different from the competition.

If you need to secure funding for your startup, you should be able to sell your product to investors first and then break into the market, but not until you have established there is a clear demand for it. According to CBInsight’s research, 35% of startups fail because there was no market need for their service or product.

Financial Risks

Most startup founders start their company with personal savings, while some raise their seed funding from their friends and family or through a business loan. Only about 0.05% of startups raise venture capital, according to a report by Fundera.

Cash flow is one of the most significant financial risks for early-stage startups, and they need to allocate their funds carefully to ensure they make the payroll and all the necessary expenses. Many startups fail to hire experts who will keep an eye on their expenditure and help them with budgeting, which can cause severe financial troubles, even bankruptcy. 

Cybercrime

As our economy becomes increasingly reliant on technology, cybersecurity is becoming a serious issue for even the smallest companies. Most businesses today store their client’s personal information on their systems or in the cloud. What many don’t understand is that they are fully responsible for protecting this information. This means that a cyber attack or a data breach can be financially devastating and greatly hurt your reputation.

Cybercriminals are increasingly targeting startups and small businesses because they believe that they won’t have the same resources to stop them, unlike large enterprises. The global pandemic forced many companies to switch to fully remote work. That left them susceptible to ransomware attacks that became the prevalent type of malware attacks.

Insurance Policies Startups Should Consider 

Basic Insurance Policies 

While every industry has a unique risk profile, there are still a number of core insurance policies that every business should consider in order to transfer risk.

Commercial General Liability Insurance: This policy will respond to third-party property damage or bodily injury claims. It will cover both defense costs and possible settlements awarded against your company. Many general liability policies will also include a degree of coverage for product liability. This means that they will cover you if a customer claims that your product or service caused them injury or damages in some way.

Workers’ Compensation: This is a policy that will protect your business and your employees in case of a workplace injury. It will pay for their medical expenses and cover lost wages caused by the injury. Workers comp in certain forms is typically compulsory in most states, with the exception of Texas.

Business Owner’s Policy (BOP): This is basically a cost-effective package deal that includes the three most important policies – commercial liability, commercial property, and business interruption.

Advanced Insurance Considerations

As your business grows, you’ll need to consider broader, standalone policies as well as protect your business from additional risk by extending the limits of your coverage and purchasing specialty insurance policies.

Employment Practices Liability (EPLI) Insurance: If your business has employees, you should strongly consider EPLI. The policy will provide protection from employment-related claims such as sexual harassment, wrongful termination, or any form of discrimination. Every year there are more and more of these claims – and they are getting increasingly expensive.

Errors & Omissions (E&O) Insurance: No matter how good you are at what you do – mistakes can and will happen. If one such mistake causes financial loss to a client, you could be sued for damages. E&O insurance will cover defense costs, settlements reached, and damages awarded against you. Any business that provides professional services to third parties (lawyers, accountants, consultations, etc.) should consider purchasing this policy.

Directors & Officers Insurance: D&O insurance is crucial for companies that have raised capital or have a board of directors. It will protect your executives from allegations of misrepresentation, errors & omissions, and breach of fiduciary duty. In many such claims, the company’s leadership can be held personally liable for the results of their decisions, putting their personal assets at risk.

Additionally, if you are seeking venture capital from investors, they will expect you to secure D&O insurance. Investors will want a seat on the board of directors, and they want to know they are protected from potential lawsuits.

Key Person Insurance: The easiest way to understand this coverage is to view it as a life insurance policy a company takes on a crucial team member – whether it’s a key executive, an irreplaceable employee, or one of the partners. In an unfortunate case of their death or disability, the policy would kick in and provide the business with the funds to weather their loss and find a suitable replacement.

Commercial Crime Insurance: Crime insurance will respond to cover crime-related losses. Most policies have deep exclusions for such exposures, which means without the right crime policy, you can be exposed to significant financial losses of money, securities, or property lost due to criminal activities. A preferred policy will protect your business from crimes committed by third parties as well as the company’s employees.

Cyber Insurance: Cyber insurance serves to mitigate most of the costs of cyber-related attacks and data breaches. Since every business is responsible for protecting its systems, you can be held liable for damages by the victims of cybercrime – typically your clients or prospects, but sometimes partners or investors may seek damages. Additionally, cyber insurance will cover first-party costs such as forensics and improvements to your network, credit monitoring services, victim notification costs, and PR handling of the situation.

The Takeaway

When the unexpected happens, and your business is going through difficult times, having the right insurance program can mean the difference between shutting down or simply shrugging off the issues by transferring their impact to the insurer. 

However, it’s important to keep in mind that every business is unique and has a unique risk profile. This is why it’s a good idea to sit down with a good insurance broker to create an insurance program specifically tailored for you – this will ensure that you’re both fully protected and aren’t ridiculously overpaying for insurance.