Startup Basics: Insurance 101

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By Carl Niedbala

meeting

Purchasing business insurance isn’t exactly a top priority for most founders.  Between generating some some good user traction, flushing out the revenue model, or closing the Series A round, insurance usually falls by the wayside.  However, procuring the proper business insurance to protect your company can be critically important to your startup’s success.

The goal of this post is to provide the 101 course on business insurance: what insurance you’ll ultimately need to protect the company and when you’ll need it.  While this list isn’t exhaustive, it’ll give you everything you need to get through the first few major growth and financing milestones of your company.

 

General Liability Insurance

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What it covers: 

Basic “business insurance” - this is what most founders think of when they think about insurance.  At the most basic level, this is your “slip and fall” insurance. GL, however, extends way beyond simple office mishaps.  It covers all kinds of bodily injury and property damage caused by your company, including actions of your employees outside of the office and the use of your products by your customers.  Policies will usually include coverage for damage to the company’s property as well as personal and advertising injury.  

Claim examples:

  • Your sales rep spilling coffee on a prospective client when meeting at a coffee shop, causing serious burns.
  • A child choking on the connected wearable device you’ve designed and marketed.
  • A blog reader suing for defamation, libel, or even copyright infringement.

You’ll need this when you…

  • Start operating a company.  Policies are usually inexpensive for startups (<$100 per month) so there’s really no excuse for not having a GL policy in place.
  • Sign a lease to a new office (it’ll be required by your landlord).
  • Sign most other contracts with vendors, distributors, retailers, and more.  This tends to be a boilerplate contract requirement.  Just keep an eye out for insurance terms in any of these contracts.

Worker’s Compensation Insurance / Disability Insurance

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What it covers:

Worker’s Comp covers injuries suffered by your own employees while performing their duties at work. Similarly, disability provides a source of income to injured employees when they can’t make it to work to perform their job.

Claim examples:

  • Employees injuring themselves on the job, whether on or off premises.  Think slips, falls, and spills.  
  • A programmer suffers from carpal tunnel due to how much code he’s writing (yes, even this ridiculous example is contemplated by WC policies).

You’ll need this when you…

  • Have employees on payroll.  Laws differ from state to state, but usually states require mandatory coverage to protect the health and welfare of your employees.  More details here.  Sometimes these will be provided automatically by the state, but check with your broker.

Errors and Omissions Insurance (E&O)

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What it covers:

 E&O covers claims against you and your company for “glitches” in your product/service.  The “glitch” can be of a professional (like a doctor’s malpractice) or technical nature.  This one of the most important insurance policies for tech startups.  

Claim examples:

  • An actual bug in your SaaS marketing/sales platform that causes users to lose money -- payments aren’t processed, leads aren’t recorded, etc.-- that leads to a class action lawsuit.
  • Your product / service doesn’t live up to your customer’s expectations; the customer alleges you haven’t honored company policies or contractual obligations.
  • Your customer alleges you’ve violated the terms of the user agreement and sues for misrepresentation or violation of contract.

You’ll need this when you…

  • Launch your product and acquire users/customers.  Once your product is “out there,” you’re exposed.
  • Sign a contract with customers, particularly if in the B2B space or dealing with any large corporate client / vendor.   

Cyber Liability

mobile

What it covers:

Cyber liability insurance mitigates costs related to data breach incidents and the loss/theft of third party data. Losses covered can include resulting lawsuits, forensic costs, data restoration costs, breach notification costs (this is a big one), regulatory costs, and more. Some policies even include coverage for PCI fines.  

Claim examples: 

  • Your AWS databases are hacked and your users sue you for the leaked 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 across the country, complying with individual state laws regarding breach notification procedures.

You’ll need this when you… 

  • Collect user data - NOTE: the data can be as basic as a name & email address.  Laws vary from state to state, but this can be enough to qualify as “personally identifiable information” (“PII”) for which you can be held liable if disclosed accidentally or maliciously.  

Directors and Officers Insurance

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What it covers:

D&O Insurance covers lawsuits against Directors or Officers of the company related to actions taken on behalf of the company in their capacity as Directors and Officers.

Claim examples:

  • A board member / shareholder bringing a derivative suit against the execs when s/he feels they’ve violated their fiduciary duties.
  • Alleged misrepresentations in offering documents / prospectus.
  • Regulatory action against directors / officers for securities-related issues: reporting errors, failure to file Reg D forms, etc.

You’ll need this when you…

  • Close a round of institutional funding - most investors will require D&O insurance.
  • Actively fill board seats -  D&O will attract talent because it shields Director(s) when they make decisions on behalf of the company. 

Employment Practices Liability Insurance (“EPLI”)

office wide angle

What it covers:

EPLI covers claims related to the Human Resources practices of the company.

Claim examples: 

  • Lawsuits for violation of employment statutes around race/gender/age discrimination and/or discriminatory hiring/firing practices.
  • Sexual harassment or hostile work environment lawsuits.
  • Wrongful termination lawsuits.

You’ll need this when you…

  • Hire! If you’re ramping up recruiting, you should have EPLI in place.  While always an important consideration, EPLI is crucial as you cross the 10 employee threshold because that is when the company becomes subject to various federal employment statutes.

Key Person Insurance

wheelchair

What it covers:

Key Person Insurance (or “Key Man Insurance”) is a life insurance policy. However, this type of life insurance policy pays out to the company rather than family upon insuredperson’s death or incapacitation. Unlike other policies, a key person insurance policy will pay out in a lump sum once coverage is approved. This is to compensate for the often steep upfront costs startups incur when trying to find a replacement and continue ops in the interim.  

Claim examples:

  • Death or permanent incapacitation of the insured person.  NOTE: there are typically exclusions around alcohol/drug abuse and suicide.

You’ll need this when you…

  • Close a round of institutional funding -- most investors will require Key Person insurance.
  • Know that your valuation is driven by your core team and the ability to execute lies with that essential roster. 

In summary, the major times to think about business insurance include 1) moving into a new office, 2) hiring employees, 3) signing clients 4) closing a round of funding, and 5) when your business starting to grow rapidly. Requirements will vary by situation, but all you have to do is reference this list when the insurance warning light goes off!  Please feel free to reference our coverage page for more detail and check out our blog to dive even deeper. 

To protect yourself from lawsuits and other legal issues, whether insurance related or not, Priori makes it easy to find a trusted, vetted attorney at a below-market, fixed rate. Find a lawyer, and get a free legal consultation here.

 

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