Many startups perceive insurance as a luxury, shelving it until they are further along in the company’s lifecycle. However, any business serious about sustainable growth should not postpone this decision.
There is always a risk is involved in the process of starting and growing a company. Having adequate insurance is key to the success of your business and an issue every business owner needs to consider. Business insurance for startups provides valuable protection against the unexpected. Without coverage, threats like theft, fire, data breaches, or lawsuits could disrupt or damage your business.
Once you understand how insurance is vital to your business, you will be better positioned to determine how much of it you need. Business owners must weigh the cost of insuring against various risks and the economic impact of an uninsured loss.
Running a business comes with inherent risks. Protecting your assets is important, yet many new companies often have insufficient insurance. How much insurance should a new business owner secure, and what are the liabilities for being uninsured? That all depends on the needs of the business.
The startup ecosystem is diverse and may or may require different types of coverage. For example, startups that work in the software area will have to protect themselves most from client lawsuits alleging professional liability. Startups working in biotech, proptech, or fintech face constantly changing and often unclear regulatory requirements may need to focus on compliance first.
Thoughtful diligence is needed during the process of deciding on the type of business insurance your startup needs. What kind of insurance best fits your startup? What is the appropriate amount of coverage? Do I need insurance this early in the game? Below are a handful of reasons your business should have insurance:
The Law Requires it
The Law requires businesses with employees to have certain types of insurance: Unemployment, workers’ compensation, and disability are a few.
Failure to carry required coverage could result in fines, penalties, and “cease and desist” orders.
You Could Get Sued
If a liability claim or a lawsuit is filed against you and your business is without insurance, there could be serious and very costly implications. Even winning could cause you to go out of business due to the cost of legal defense. Liability insurance allows you to concentrate on what you do best, running a profitable business.
Insurance Keeps You Up and Running
What happens if your business is affected by an earthquake or flood? P&C insurance covers loss of property, equipment, etc., income lost during a business closure. Business Owners Insurance (BOP) can play a critical role and help a company survive protecting against income loss. BOP also compensates for everyday operating expenses you may have otherwise incurred during that time. Some companies choose to insure lost income and include protection to pay employees for up to 12 months.
Required in Contracts
Some variables come into play when it comes to insurance and contracts: If you lease or rent, the landlord’s policy may not cover you, and you may need to carry insurance. The loan agreement likely contains an insurance requirement if you borrow money to finance buildings, equipment, or operations. Client contracts could specify that you carry insurance.
Common types of insurance businesses should consider:
Workers’ Compensation Board (WCB)
Your business is growing. How do you know if it is time to protect it with workers’ compensation insurance? Most business operations will be required to have workers’ compensation coverage. This covers workers’ medical and wage-loss costs if an employee is injured or contracts an occupational disease while on the job.
Directors and Officers Insurance
D&O insurance is for businesses that are incorporated. In general, D&O insurance provides coverage against the wrongful acts committed by directors and officers. Are you looking to raise money? Many institutional investors, such as venture capital firms, stipulate that a D&O policy must be in place as part of the term sheet before the financing is complete.
Employment Practices Liability Insurance: As your company begins hiring, consider EPLI Insurance. EPLI protects your company from employment-related lawsuits such as sexual harassment, discrimination, wrongful termination, and more.
Technology Errors & Omissions Insurance: A startup providing professional services based on professional expertise should consider E&O insurance which protects against claims that allege damages arising from technology services you have provided. Your customers and partners may even require it.
Fiduciary Liability Insurance: If your company offers employee benefits such as health insurance, stock options, and other benefits, you probably have a person responsible for handling these benefits. FLI protects your company and your employees if someone responsible for these benefits makes a mistake for which they can be held liable.
No company owner can predict what might happen down the road. In a perfect world, natural disasters, injuries on the job, or lawsuits never came to pass, but there is no guarantee that such things won’t happen. For that reason alone, it’s best to have your company insured.
André Thiollier is a partner with Foley & Lardner LLP