Building a startup is brutally hard. Most startup founders want to focus on bringing real innovation to their chosen fields. However, what typically happens is that they are met with a gauntlet of challenges and risks. Employee-related claims, property damage, product failures, and contractual disputes are all a distinct and costly possibility in the lifetime of a startup.
As a growing company, buying the right insurance will enable you to manage these unpredicted risks and avoid the financial stressors that could potentially put your business under. However, buying business insurance, in general, is a tedious proposition and startups have it even harder. Most legacy insurers just don’t understand what startups need and don’t have custom policies tailored to their needs.
To help any startups looking for insurance, we’ll cover what policies startups actually need, what factors insurers use to determine the cost of startup insurance, and how to ensure you are properly covered.
What Policies Do Startups Need?
General Liability Insurance: A basic policy that will protect your company’s assets, such as computers, and furniture, from loss. It will also protect you from claims of injury and property damage occurring on your property. If you’re leasing property, this policy will typically be required.
Workers’ Compensation: Even if startups typically operate in a low-risk environment (desk work in offices), employees can still be exposed to injury. Workers’ compensation will pay for medical care and lost wages in these cases.
Directors and Officers (D&O) Insurance: This policy would cover defense costs and damages if anyone associated with the management of your startup was to be sued for breach of fiduciary duty, misrepresentation, or mismanagement. The reason D&O insurance is so important is that it also protects the personal assets of your executives (both current and past) from these lawsuits. Additionally, most investors and venture capital firms will consider purchasing this policy a requirement before funding is secured. Most investors serve on the board of directors of startups they invest in and they want to know their personal assets will be protected.
Technology Errors & Omissions (E&O) Insurance: An important policy for startups because most rely on tech solutions to bring innovation to their industries. A tech E&O policy would respond to cover your company if your service or product does not perform the way that it is supposed to perform, or causes damages to the users.
Cyber Liability Insurance: If you store the personal information of your customers or partners, you’re at risk of costly data breaches. Your cyber policy would respond to cover first-party costs of a data breach, including forensics, the costs to notify affected users, and credit monitoring. It will also protect you from third-party lawsuits from those who suffered damages from the attack, cyber extortion, and regulatory fines and penalties.
Employment Practices Liability Insurance (EPLI): Protects from employment-related claims (wrongful termination, harassment, discrimination, etc.). EPL insurance isn’t mandatory (unlike worker’s comp, for instance), so it’s an easy policy to skip for startups – especially smaller companies who don’t believe they’ll have these types of issues because of their small employee count. However, this may prove to be unwise. Employee lawsuits are on the rise and their costs can sink even a business that’s financially stable.
How Much Does Startup Insurance Cost?
A common problem that startups face and a general problem with insurance underwriting is that it’s really hard to know how premiums are calculated and what factors affect the cost of insurance. Let’s breakdown the main factors that affect the cost of insurance for startups:
Size of the company – The total number of employees and the projected revenue in the next 12-months will be taken into account. For early-stage startups that don’t have any projected revenue, most insurers will look at your physical business location or your payroll.
Location – This is an important factor not only because of potential natural disasters but also because each state has a separate set of requirements and legal characteristics that could affect your insurance.
Prior claims – Your claim history will be taken into consideration and, naturally, if you haven’t had any claims to deal with, your premiums will be lower.
Funding – How much venture funding you’ve secured thus far and from whom will affect your premium. Working with premium VC firms will mean cheaper insurance.
Sensitive information – If you handle a lot of sensitive customer information, you can expect to pay more for cyber coverage.
Our hope is that this article will allow you to make a more informed choice when buying insurance for your startup. If you need more information and want to talk to an insurance expert or get instant quotes, you can check out Embroker’s Startup Program. It’s the first-ever fully digital insurance program for startups.
