Welcome to the first in a series of posts that will (hopefully) demystify the world of commercial insurance. The goal of this guide is to outline how the risks your company faces evolve as your growth accelerates. We’ll cover what insurance policies you should consider and how they can keep you on course should things go wrong.
Now, not everyone will follow this path, but we’ll try to touch on all the major milestones you’ll likely to hit on your journey. The first phase we’ll dive into is what we’ve coined, “The Beta Stage”. This is the phase where the company will need all the basics.
General liability, property, workers compensation, errors and omissions, and cyber liability can be crucial in this phase. In this stage, you’ll be…
- Raising a friends and family or seed round
- Hacking sales with cold outreach, networking events, and signup landing pages
- Hiring the first ten or so employees
- Iterating quickly to find a product/market fit
The Beta phase is all about creating the baseline insurance shield that will protect the company as it grows and scales. Though budgets are often tight during this phase, it’s important to get these policies in place as early as possible.
If you buy insurance three years into the company’s life, the first three years of activity will often not be covered by the policies. They’ll have a “retroactive date” limiting coverage to after the inception of the policy, leaving you exposed to latent issues from the early years of pivots and rapid iteration. Nightmares of old can come back to haunt you.
General Liability & Property
Commercial general liability (CGL) insurance protects your company from some of the fundamental risks that come with running a small business. During day-to-day operations, you and your employees will be interacting with customers, clients, vendors, and contractors to name a few. Any of them could get injured or suffer a loss and file a lawsuit against you.
General liability has some optional enhancements to protect against risks unique that impact specific industries. For example, if you run an e-commerce business, it can reimburse you for the manufacturing or design defects of your products. However, as your company grows you may need a standalone policy, and there will be more on that later.
Property insurance covers the stuff the business owns. It would reimburse the company for things like furniture, computers, and covered inventory after a fire. If your policy offers theft coverage, the impact of a burglary is reduced too.
As with all early-stage startups, cash flow is always top of mind. One cost-effective option to consider is a Business Owners Policy (BOP). A BOP is an enhanced insurance policy that combines general liability and property insurance, which can often lead to savings versus buying these policies separately.
When do you need this?
- Start your company.
- Sign a lease on new office space. Most landlords require proof of insurance when signing a lease.
- Sign basically any other contract with vendors, distributors, and retailers. This tends to be a boilerplate contract requirement, so keep an eye out for insurance terms.
- You’ve ordered some brand new Macbooks or received your first shipment of inventory.
Cyber liability insurance protects businesses against targeted attacks and even the occasional misplaced laptop containing confidential material. If your company has employees, handles sensitive client information, or has an online presence, you are vulnerable.
The goal of these policies is to address the risk exposure created by various electronic activities, the most common of which are collecting or storing some kind of Personally Identifiable Information (PII):
Claim scenario examples…
- Your AWS databases are hacked and your users sue you for leaking information.
- An employee leaves a laptop or phone in a cab that’s picked up by someone who leaks private user data.
- You suspect there may have been a breach and you have to notify your users to comply with individual state laws regarding breach notification procedures.
- You’re hit with a DDoS attack and you have to shut down your site for a few days, causing lost profits and expenses to build up.
When do you need this?
- If you collect user data. The data can be as basic as a name and email address. Laws vary from state to state, but this can be enough to qualify as “personally identifiable information” (“PII”), which you can be held liable for if disclosed accidentally or maliciously.
The more sensitive the data you collect, the higher the risk and fallout from a data breach. This policy can be particularly important for SaaS, e-commerce, and on-demand companies when you get the first wave of new customers.
Professional Liability aka Errors & Omissions
Professional Liability insurance protects your business if you are sued for negligently performing your services, even if you haven’t made a mistake. It protects against two very big risks:
- The financial loss of a third party, arising from failure of the insured’s product to perform as intended or expected
- The financial loss of a third party, arising from an act, error, or omission committed in the course of your performance of services
Essentially, if your company provides a service whereby an error, mistake, or interruption of your service results in your client losing money, this is when E&O would come into play.
If you run a tech business you should look at Technology E&O, which is specifically designed to address the unique exposures presented by technology companies. It can often be bundled together with cyber insurance, which we recommend to the majority of our clients.
When do you need this?
- You launch your product and acquire customers. Once your product is out in the wild, you’re exposed.
- Sign a contract with customers, particularly if in the B2B space or dealing with any large corporate vendors.
This one only applies if you currently have employees. Workers compensation insurance protects your employees and business from work-related accidents, illnesses, and even death. Nearly every state requires that employers have insurance to cover medical costs and lost wages for workers who are injured or become ill on the job.
When do you need this?
- When you have employees on the payroll. The laws differ from state to state, but usually, they require coverage to protect the welfare of your team. Sometimes these will be provided automatically by the state, but whoever you buy insurance from can tell you one way or the other.
Even if you hire workers as 1099 independent contractors, be aware of the ABC rule and the AB5 ruling that passed in California. You could be exposed if you don’t currently have Workers Comp!
This all sounds expensive.
It can be expensive, but it depends on whether you view it as a cost or an investment. We’ve had the pleasure of working with some truly innovative companies and seen them grow from bootstrapping in coffee shops to raising $300M+ rounds.
In the beginning, startups are often tempted to get cheap policies and treat it as tick the box item—then hope nothing bad happens. From what we’ve seen with sketchy coverages that don’t payout, it doesn’t end well.
Insurance can be just another cost of doing business, or it can be an investment you can use in your favor. It can be quick, cheap, and ineffective, or, just like your company, it can take a little time to create but add massive value in the end. The most important thing is to understand what risks your company faces as it gains momentum.