Many startups view insurance as a luxury, putting it aside until they are further along in the business lifecycle. However, any company serious about sustainable growth should not postpone this decision.
There is always risk in the process of starting and growing a business. Having adequate insurance is key to the success of your business and something every business owner should 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 vital insurance is to your business, you’ll be in a better position to determine how much you need. Business owners must weigh the cost of insuring against various risks against the economic impact of an uninsured loss.
Running a business has inherent risks. Protecting your assets is important, but many new businesses often have insufficient insurance. How much insurance should a new business owner have and what are the responsibilities if they are uninsured? It 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 software will need to protect themselves the most from customer lawsuits alleging professional liability. Startups working in biotech, proptech, or fintech face ever-changing and often unclear regulatory requirements that may need to focus on compliance first.
Due diligence is required when deciding what type of business insurance your startup needs. What type of insurance is best for your startup? What is the appropriate coverage amount? Do I need insurance so early in the game? Here are some reasons why your business should purchase insurance:
The law requires it
Businesses with employees are required by law to have certain types of insurance: unemployment, workers’ compensation, and disability are a few.
Failure to meet the required coverage may result in fines, penalties and “cease and desist” orders.
You could be sued
If a liability claim or lawsuit is brought against you and your business does not have insurance, the consequences could be serious and very costly. Even winning could put you out of business due to the cost of legal defense. Liability insurance allows you to focus on what you do best, running a profitable business.
Insurance keeps you operational
What happens if your business is hit by an earthquake or flood? Damage insurance covers loss of property, equipment, etc., loss of income during a business closure. Business owners insurance (BOP) can play a vital role in helping a business survive by protecting against loss of revenue. BOP also offsets the daily operating expenses you would otherwise have incurred during this time. Some companies choose to insure loss of earnings and include protection to pay employees for up to 12 months.
Required in contracts
Certain variables come into play when it comes to insurance and contracts: if you rent or lease, the landlord’s policy may not cover you and you may need to purchase insurance. The loan agreement likely contains a requirement for insurance if you are borrowing money to finance buildings, equipment or operations. Customer contracts may specify that you carry insurance.
Common types of insurance companies should consider:
Workers Compensation Board (WCB)
Your business is growing. How do you know if it’s time to protect it with workers’ compensation insurance? Most business operations will need to have workers’ compensation coverage. This covers workers’ medical expenses and lost wages if an employee is injured or contracts an occupational disease on the job.
Directors and Officers Insurance
D&O insurance is for incorporated businesses. In general, D&O insurance provides coverage against wrongful acts committed by directors and officers. Are you looking to raise funds? Many institutional investors, such as venture capitalists, stipulate that a D&O policy must be in place as part of the term sheet before funding is completed.
Professional liability insurance: As your company begins to hire, consider EPLI Insurance. EPLI protects your business against employment-related lawsuits such as sexual harassment, discrimination, wrongful dismissal, etc.
Technological errors and omissions insurance: A startup providing professional services based on professional expertise should consider errors and omissions insurance that protects against claims alleging damages resulting from the technology services you provided. Your customers and partners may even need it.
Fiduciary liability insurance: If your company offers benefits such as health insurance, stock options, and other perks, you likely have someone responsible for administering those benefits. FLI protects your business and your employees if a benefits provider makes an error for which they can be held responsible.
No business owner can predict what might happen later. In a perfect world, natural disasters, workplace injuries, or lawsuits never happened, but there’s no guarantee that such things won’t happen. For this reason alone, it is best to have your business insured.