As more people are choosing to leave corporate life behind and start their own businesses, the amount of startup advice has proliferated on the internet. Unfortunately, insurance advice has lagged behind or is often non-existent for these businesses.
As a startup founder, one of the primary things you need to consider when looking to protect your new investment is purchasing insurance. With so many things on your to-do list, especially when you’re just starting out, getting the right policies may not seem like a top priority. A lot of founders get caught thinking of insurance as just another expense or simply a legal requirement to check a box. But running a business comes with a lot of risks, as accidents can happen anytime and a single claim against your business could lead to a huge financial loss.
With the right insurance coverage, you can help ensure business continuity and that the costs associated with third party claims are being properly handled. Additionally, insurance might be a legal requirement, which means that it’s often less about if you need coverage but rather what policies you need.
Here's a rundown of the essential policies that you need to consider to protect your business:
General Liability insurance - Startup owners will need this type of policy right from the start. It serves as your first line of defense against claims associated with physical or bodily injury. This policy will handle the expenses related to any such claims, enabling your business to operate continuously. It can be purchased on its own or in a package called a Business Owners Policy (BOP), which combines General Liability with Commercial Property insurance. Many startup owners opt for this package instead of buying two policies separately for convenience as well as to save some money on premiums.
Commercial Property insurance - This is the other half of the Business Owners Policy. As the name suggests, it is designed to protect your startup's physical assets including tools, equipment, computers, and office space. If the business experiences a theft, fire, or other natural disaster, Commercial Property insurance will cover the expenses. But, keep in mind that if you operate in a flood-prone area, you may want to purchase additional coverage. Just like General Liability, Commercial Property insurance is recommended as soon as you start your business.
Workers Compensation insurance - When you start adding to your team, even if it’s just one hire, you need to purchase this type of policy, as it is a legal requirement in nearly every state. It protects you against financial losses due to claims associated with bodily injuries your employees may sustain in the course of employment. Workers Compensation insurance will pay for the medical fees and rehabilitation expenses. Also, if the injured employee needs to recover and cannot go back to work, this coverage will pay for the lost salary. It is important to note that founders do not have to acquire a Workers Compensation policy for themselves.
Professional Liability or Errors & Omissions insurance - This policy protects you against the financial loss of a third party (i.e. a client) arising from a failure of your product or service to perform as intended or expected. It also protects you from financial losses of that party arising from an act, error, or omission committed in the course of your performance of services for another. For technology companies, it is recommended to purchase a Technology E&O policy which combines E&O with a Cyber Liability policy to form a more comprehensive policy to protect your professional offerings. Having this coverage in place is often a condition precedent to signing a client contract.
Cyber Liability insurance - In this day and age when more and more people rely on the digital route to manage their transactions, data protection and security have become even more crucial. Hackers are constantly finding innovative ways to steal confidential information, and new data breaches make the headlines every week. After a breach, it takes the average business 256 days to realize their data has been compromised; after that, notification costs average nearly $200 per record that’s been stolen. Multiply that by your total number of customers and you’ll see just how quickly that can add up. If your startup maintains any personally identifiable information on customers, Cyber Liability is appropriate for your organization. The policy covers most cyber-related risks, such as costs related to a data breach, notification expenses, fines, credit monitoring, and penalties.
Directors & Officers Liability insurance - As your business grows, so will your staff. Your Board of Directors and other senior members of management might request protection from claims associated with wrongful acts while running the company. This policy protects the personal assets of the decision makers within the business if the company is unable (legally) or unwilling to provide corporate indemnification. Private Company D&O is broadly written liability protection for the D’s & O’s to defend against any wrongful act allegations made by a third party including customers, suppliers, or government agencies. Often times, outside investors or potential new board members will request this coverage be put in place prior to closing any outside funding or joining the board.
Employment Practices Liability insurance - As you grow your team, you also increase the chance that certain employees may become disgruntled or face employment-related issues, whether it’s sexual harassment, discrimination, failure to promote, defamation or wrongful termination. A single claim can lead to financial losses, and can damage your business reputation. This policy will keep you covered against these claims. Most companies buy this policy when the organizational structure expands beyond just a few employees and the exposure is more widespread. Startups typically begin to think about purchasing EPLI around Series A or B funding, but there is no exact “right” time to buy it.
Choosing the right types of insurance for your startup can be overwhelming, especially if you haven’t had much exposure to insurance in the past. The above are just a few of the “essential” policies we suggest for entrepreneurs as they nurture and grow their new company. We recommend consulting a reputable insurance broker to discuss the specifics of your business.
About Pierce Leonard
Pierce Leonard is a Senior Advisor at CoverWallet, Inc. helping high-growth startup clients plan, optimize, and simplify their insurance needs. He has extensive experience placing D&O, E&O, Cyber, and other Executive Liability insurance products/solutions for startups nationwide. He has led clients from Seed funding all the way through IPO.
This article is intended for informational purposes only, and doesn't constitute tax, accounting, or legal advice. Everyone's situation is different! For advice in light of your unique circumstances, consult a tax advisor, accountant, or lawyer.