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Navigating Insurance Needs as a Growing Startup

One of the several hundred things you need to worry about as the founder and leader of a startup is making certain that your business has the proper insurance coverage. And while this is something that may not be at the top of your list of priorities, it’s undeniably a very important aspect of being able to grow your business successfully. 

A company’s need for insurance expands in stride with the company’s growth, so startups typically don’t have to purchase every single type of commercial insurance right off the bat.

There are many factors that go into determining your coverage needs and the level of acceptable risk that your startup encounters. Some of those include the nature of your business itself, your growth trajectory, revenue, number of employees and customers, contractual relations, and so on. 

Regardless of the stage and size of your startup, it’s undeniably important to be sure that you are in contact with a broker that understands startups and is able to put together a startup insurance program that coincides with your business’s specific needs. 

Let’s take a deeper look into what a typical roadmap looks like for growing startups in terms of the coverages they tend to need as they develop.

Early-Stage (Seed) Startups 

In this stage of growth, there’s a good chance that you are the only employee and your funding is coming from your own pocket, family or friend sources, or a bank loan. But just because you don’t have employees or customers yet, that doesn’t mean that you don’t need insurance. 

Workers’ compensation insurance is mandated by law in every state except Texas once you have employees.  However, if you are the sole employee of a formally established company, your company’s interests would be best protected if a policy was purchased.  This is because state regulations will consider technically the company has an employee, you the founder. Therefore, securing workers’ compensation coverage is a legal obligation, not a choice. 

The staple coverage that every business needs is general liability and property coverage, which is often packaged together and referred to as a business owners policy (BOP). Obtaining a BOP will enable you to protect your physical assets such as furniture and computers. Do not presume your homeowners’ policy will address your business insurance needs since homeowners’ policies will contain restrictions for commercial use of your home, especially damage to equipment.

If you’re looking to lease a small office or any other type of property, going to conferences, or contracting with partners, a general liability policy is typically required. General liability will protect you from possible claims related to injuries suffered by a third party that either occur on your business property or result from your operations and services. 

Prior to taking your product or service to market and earning your first customers, it’s time to think about two more coverages that are, more often than not, purchased together: technology errors & omissions and cyber liability insurance

E&O offers protection for startups that provide a service or product to customers against any claims that allege financial loss related to the work performed by the startup. For example, if you have signed a contract to complete a project by a certain date and you failed to do so, you could be sued by the client for breach of contract. Your E&O policy would cover legal expenses and settlements that are awarded. 

Tech startups especially need a very strong cyber policy because experiencing a data breach or cyberattack without insurance can be absolutely devastating to a young startup financially. There are regulatory remediation requirements following a data breach and a cyber policy will cover the associated expenses that arise as well as any legal liabilities. 

Funded (Series A) Startups

Once you’re on the verge of receiving funding or you have already secured an investment, it’s time to start the process of acquiring another set of insurance products. The most notable one for startups in this stage of growth is directors & officers insurance, which will address allegations of mismanagement. Most VCs that invest in a company will want someone from their firm to participate on your board of directors and will require they be properly protected with this policy. D&O insurance is both a necessary coverage for startups looking for funding and an excellent recruitment tool for companies interested in bringing on experienced executives to join their leadership. 

Another employee-related coverage that startups should have once staff is added is employment practices liability insurance (EPLI). This coverage protects your startup from expenses related to potential harassment, discrimination, and wrongful termination lawsuits, among others. 

As any startup founder knows, today’s workforce tends to be more motivated by exceptional employee benefits than anything else you offer them. If you plan on providing benefit plans to your employees, you’re going to need fiduciary liability insurance. It can protect both your business and staff that manage employee benefit and retirement plans from legal liabilities related to mistakes made while administering the programs. 

High-Growth Startups ( Series B, C, etc.)

As your company continues to grow and you begin to distance yourself from the “startup” world with larger rounds of funding and accelerated growth, the coverages you will need to add will become somewhat more specific and complex.

Key person life insurance policy is many times overlooked as to its importance. The death or disability of the founder, top executive, or a critical employee could seriously jeopardize the company’s continued success. Therefore, purchasing this policy on those individuals who are an integral part of the company’s future growth is an essential component of the overall insurance program and related business strategies.

Another significant coverage is commercial crime insurance, which offers protection from losses related to employee theft and third-party fraud. A 2016 study by a global insurer, Hiscox, discovered the average employee dishonesty loss was approximately $290,000 for those businesses who had less than 50 employees. Third-party fraud is increasing as more small to midsize businesses are being targeted with invasive hacking techniques to acquire passwords and usernames to steal funds from their business accounts.  A good crime policy protects against first-party crimes such as employee embezzlement and third-party financial scams coming from outside of the company. 

The dynamics of your business model may expand the company into a global environment.  Consequently, you may find yourself traveling overseas, opening foreign locations or obtaining international customers. In this regard, a foreign package will be needed to address those international risks not covered by your existing BOP or other US policies.  This would include insurance for non-USA-owned assets, loss of earnings from an interruption to your foreign supply chain, injuries to your employees while overseas, and kidnap & ransom, just to name a few.

While most errors & omissions insurance has the ability to include “media liability,” which covers claims related to copyright, logo, and similar infringements, it does not protect against patent-related risks. Intellectual property insurance is a sophisticated policy type that covers the legal fees for claims of alleged patent infringement brought against you, or reimbursement of expenses when you are enforcing your own patents.

Conclusion 

The simplest lesson to take away from all this is that your insurance program needs to grow in step with your business. As your startup grows, your building and staff count grow, your contracts become more complex, and you enter into new partnerships. All these new things introduce new risks that business insurance can help mitigate. 

Be sure to align yourself with carriers and brokers who specialize in startups and have vast knowledge about companies operating within your industry or niche. This will ensure that you are buying the right policies at the right time, covering as many gaps as possible, and properly investing in the continued growth and success of your startup.

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