Establishing a startup business is all about taking risks. That’s what makes them so exhilarating, enticing, and nerve-wracking all at the same time. This element of risk is also what makes insurance for startups so imperative. Read on to learn more about the common risks startups face, and the four types of insurance that can cost-effectively protect your startup against them.
Each startup comes with unique risks that are native to its given industry, but there are several risks that are common to all startups.
Finding startup insurance is a painful exercise for any entrepreneur. Not only is the process cumbersome, but it’s often low on the priority list. Between building a product, hiring staff, signing partnerships, and raising money, there are minimal resources preserved for finding insurance. This mistake is common, but shortsighted nonetheless, as basic insurance is a requirement for any startup incubator, and most customers/investors require it. This means that entrepreneurs have no choice but to find the right insurance for their startup.
Several frustrations arise when finding insurance for startups, the largest of which is understanding what type to get. Answering this crucial question — will this cover the most common risks? — isn’t as easy as it may seem. There are countless products, dozens of options, and numerous providers. Most entrepreneurs only understand that they need “$1M General Liability”, and so they simply sign up for the cheapest policy showcasing those keywords. However, this method doesn’t allow them to rest assured that they got the best coverage at the right price. Insurance is complicated and its pricing even more so.
When searching for startup insurance, it’s best to start by asking yourself 3 questions:
1. Why do I need startup insurance?
The most important reason you need insurance is to protect your startup against unexpected risks that you could not financially afford.For example, a few stolen computer monitors may cost $10,000, which is reasonably affordable. However, the lawsuits that occur after a security breach of customer data would be financially ruinous for most startups.
Another important reason startups need insurance is that most investors or customers require that startups have proof of insurance coverage. Many startups scramble to get the appropriate coverages before they sign a new contract. Rather than raise your stress levels at the last minute and risk losing the deal, you’re better off proactively managing your insurance needs. (Look for our future article providing the typical check-list an investor uses to ensure the startup has appropriate insurance.)
2. What kind of insurance is best for my startup?
The second and perhaps more difficult is deciding which kind of insurance to purchase. Understanding the four basic startup insurance products will go a long way to making sure you’re protected over the long-term.
There are four common insurance products every startup should consider:
I. General Liability
General Liability insurance covers you when you are found legally responsible for injury to a third party (i.e., someone other than you or your employees), or damage to someone else’s property. This typically includes physical injury (e.g., customer slips and falls), and non-physical injuries, such as slander or libel.
Cyber-related incidents, such as copyright and trademark infringement, electronic data recovery and unintended discloser of customer records is typically excluded from a CGL policy. For the best coverage against such risks, consider a Cyber Liability policy.
Other insurance products, which are outside the scope of this article, provide coverage for injuries to yourself and your employees.
Example General Liability Claims
- A customer slips into your office and breaks her wrist
- An employee hits a building while driving to a customer meeting, and the building owner sues for damages
- A customer gets a rash when she wears the scarf you sold and sues for damages
Read more about General Liability Insurance here.
II. Directors & Officers (D&O)
Your board members are responsible for overseeing the business and have a fiduciary duty to ensure the best actions are taken on behalf of the company. As a result, they are often held accountable for the actions — and inactions — of the businesses they oversee. To ensure your board of directors are protected in case of a lawsuit and have access to legal support, the safest option is to have a D&O policy in place. Some policies cover former directors as well. Note that if you are looking for institutional money, you are almost always required to get D&O insurance.
Example D&O Claims
- A disgruntled employee sues for wrongful termination
- Customers allege a pattern of price-fixing and sue the directors for not identifying and stopping this
- A regulatory body sues the company for inappropriate accounting standards
Read more about D&O here.
III. Commercial Property/Contents Insurance
Property insurance protects the physical assets you own, such as computers, inventory, supplies, or furniture. In case of theft or damage (e.g., due to a fire), your insurance will cover repair or replacement. Sometimes Property insurance includes Business Interruption Coverage, which is compensation for loss of business income in the event of a claim
Example Property Insurance Claims
- Fire damage to computers
- A backed-up drain destroying a room full of inventory (e.g., t-shirts)
- Theft of your office furniture or supplies
Read more about Commercial Property Insurance here.
IV. Errors & Omissions (E&O), or Professional Liability
Despite your best efforts to deliver the best product or service to your customer, there is always a chance that you might make a mistake. In specific professional fields (e.g., software development, medicine, law), your customers can sue you for any damage they believe you caused. The financial burden to protect yourself could be significant. You can get sued even if the loss is not your fault. For instance, let’s say the payment system integrated into your product fails to work — your customers could sue you for lost revenue. Fortunately, Professional Liability insurance provides protection against such claims.
Example E&O Claims
- Inaccurate advice or information
- Missing a deadline, causing your customer to lose sales
- Breaching specific terms in a contract
Beyond these four insurance products, there are many others that startups could consider, such as Cyber Liability and Key Person Risk. Speak to your insurance broker for advice on the risks specific to your business for which you should consider insurance.
Read more about E&O insurance here.
3. Where do I purchase startup insurance?
The final question is where to purchase your startup insurance. All commercial insurance is sold by licensed professionals, known as brokers or agents. Their role is to understand your business, and then recommend specific products that are best suited for the risks you face. Typically, you will get multiple quotes, providing slightly varying levels of coverage. It is important to understand the different quotes and review the “exclusions” to ensure your biggest risks are truly covered.
Online commercial insurance providers are emerging to help streamline the process. Purchasing insurance online takes the tediousness out of the task, as it requires minimal human interaction and, not to mention, minimal phone calls.
Zensurance is Canada’s leading online commercial insurance broker. We offer a full range of insurance products to small businesses, with a particular focus on startups. We understand what it is to be a startup, and know the most common risks of which you should be aware. Based on that (and a lot of analytics), we recommend the ideal insurance coverage for your business.
This article is a general overview of the most common insurance products and not a recommendation for a specific company