Buying business insurance for a startup can be a daunting task. The commercial insurance market is fragmented and finding a broker that understands the startup community can be difficult.
Here is a short list of “do’s” and don’ts” for buying business insurance to help make the process as stress-free as possible:
The Do's and Don'ts of Buying Business Insurance
What To Do:
Vet Your Broker
Most brokers become successful because they’re not general practitioners - they focus on mastering a specific industry. Make sure that your broker fully understands your business model and the inherent risks to your company. A good broker will thoroughly vet your company with a fine-tooth comb.
You should choose your commercial insurance broker just as you would choose any business partner, supplier, or service provider. Ask investors and trusted fellow founders for their opinions and recommendations. Research potential broker-partners to understand their philosophy and approach. If possible, check in with current clients to see how their experience has been with the brokerage. Make sure you’re on board with the broker’s methods by understanding how they work: what’s the application process like? What kind of support is offered?
Make sure you feel good about this partnership because explaining and re-explaining your business model to every broker you work with just causes more headaches and growth pains than needed. Your broker should have your back and be excited about the future of your startup.
Once you’ve found your insurance broker and have quotes in hand, don’t hesitate to dig into the coverage and ask questions. Insurance should be viewed as an investment rather than just another cost, and your broker should know this.
Here’s what’s required: proper coverage for the inherent risks your startup faces, flexibility to modify coverage as your company changes, and scalability to layer on coverage as your company grows.
What NOT To Do:
Go to Multiple Brokers (at first…)
Shopping around isn’t really helpful when buying your startup insurance coverage. Here’s why:
By approaching an insurance company on your behalf, a broker becomes the “broker of record.” As the broker of record, he/she is the only broker that can talk to any single carrier at any given time. This gives the broker the best chance to make his/her case on your behalf without any residual noise.
When you approach multiple brokers at the same time, they’ll likely go to similar markets - those that are best for your specific company - assuming they’re in tune with the space in which you operate. Depending on the order in which you approached each broker, brokers can be blocked at certain markets because another has already approached those markets. The process is now hindered and you’re pushed into choosing the preferred broker as you should have done in the first place.
Life is much easier when you vet a broker at the outset. You want to make sure that you go with a broker that has strong underwriter relationships with the insurance carriers most relevant to your company. The quoting process can be tedious and you don’t want to do it more than once. The best broker for you will leverage the right underwriters at the right carriers the first time, saving you valuable time and effort.
If your broker can’t get you the right policy to protect your business, it's time to approach another broker. Here’s a pro tip: ask the first broker for all the applications that were submitted on your behalf as well as a list of insurance carriers who declined to quote. This will expedite the process moving forward.
Underwriters require a fair bit of information to create an insurance proposal. When you think about it, they’re essentially extending you a multimillion dollar line of credit for when things go wrong, so it shouldn’t be a surprise that they want to conduct their due diligence as well. This is particularly true for policies vital to venture-backed startup companies: technology errors or omissions insurance, cyber liability insurance, or directors and officers insurance, to name a few.
You should be aware that you’ll almost certainly need to submit financial statements (and maybe pro-formas), sample customer contracts or ToS, written HR practices, and an investor deck (depending on the coverage requested).
Quality information is crucial. You want to give your broker as much leverage as possible to negotiate in your favor with the underwriters writing your risk exposure and annual premiums. A broker that goes to bat with a vague or incomplete picture of the business will just end up with an inbox full of underwriter information requests that will be sent your way. Again, avoid the headache! The goal is to try to provide complete answers to underwriter questions the first time to cut down the underwriting process and get quotes as quickly as possible.
Hopefully this list of basic guidelines helps make your insurance purchasing process as stress-free as possible! Of course, feel free to reach out to us at Founder Shield if you have any questions about purchasing insurance for startups.