In this article, we will help you understand the basics of startup insurance. After going through it, you will have a clear idea of why startups and businesses in the growth stage require insurance and different insurance coverage you should consider if you are a startup owner. You will also have a decent knowledge of the risks you can transfer to third parties by adopting the right insurance package and risk management plan.

Let’s proceed then!

Why do startups and growth stage businesses require insurance?

Many startups consider insurance to be a luxury. They think they will explore it after they move further along in the business lifecycle. However, this is not always the best strategy. Any business, large or small, that is committed to long-term growth should not hold the process of acquiring the correct coverage. This is because risk is always involved in the process of starting and managing a company.

If you have raised a business from scratch, we can safely assume that you must have taken quite a bit of risk while managing the business. Many entrepreneurs overlook the importance of developing a strategy. This is the best and most obvious approach to shift a big percentage of the risk away from the business and the owners. A proper insurance coverage can do this task for startups. Using insurance policies as a risk transfer tool can assist the founders in making the startup more appealing to potential investors, partners, and other third parties. The involvement of all these parties is likely to be required to propel the business onto a healthy and steady growth trajectory.

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Please note that the risk transfer requirements can vary, depending on the type of startup. The startup ecosystem is extremely diversified. This means that no two startups, regardless of their present stage of growth, require the same type of insurance coverage. For example, startups operating in software development and developing SaaS solutions may be particularly vulnerable to customer lawsuits. Such lawsuits may assert professional liability or negligence if their products fail to perform as promised. On the other hand, E-commerce and on-demand startups have completely different needs altogether. They will need to target their risk management strategies towards keeping their customer data away from the clutches of cybercriminals.

Then there are cutting-edge software startups in fields such as biotechnology, cleantech, or finance. They confront continuously changing and often ambiguous regulatory requirements that can be extremely risky to handle. Naturally, they must prioritise compliance above everything else. Not to mention startups in emerging industries, such as commercial drone operators, who require the skilled advice of a broker intimately familiar with their industry, to obtain the appropriate coverage.

From the discussion above, we can sum up that due diligence is required not only in selecting the type of business insurance coverage your startup needs, but also in deciding how and where to obtain the same. You need to find the answers to the following questions before making an informed decision in this regard-

  • What type of insurance coverage best fits the needs of your startup?
  • What is a fair value for insurance?
  • What is the exact amount of coverage?
  • Who should you consult with before purchasing?

Insurance and growth prospects of a startup

We have discussed that developing a risk management policy is similar to investing in your business by leveraging insurance and ensuring longevity. Here we will discuss how the right coverage and risk management strategies may help your startup grow faster:

  • To attract top talents

Having an appealing employee insurance package is critical for retaining and attracting skilled and experienced employees. The best talents are not only concerned with money, but also with excellent perks. You will lose the most talented candidates if you do not offer sufficient health insurance and other modern employee benefits coverage to your employees.

  • To attract investors

Having insurance in place before starting the fundraising activities demonstrates the founders' capacity to plan long term and their penchant to prioritise organizational longevity. Having the correct insurance coverage can often assist investors throughout the due diligence process. it will also increase a company's chances of attracting the right financing collaborators.

  • To build customer relationships

Building trust between your startup and its clients is crucial, especially if you are a B2B (Business to Business) startup. Consumers usually seek insurance requirements and proof of insurance prior to signing a deal.

Now that you have a fair idea about how insurance can help a startup or a growing business, let's turn our attention to the different types of insurance you may consider.

Insurance Policies a Startup May Need

Insurance policies a startup may need

A typical insurance program for startups and growing businesses should include the following-

  • Director's & Officer's Insurance (D&O Insurance)

D&O Insurance is a policy designed to cover the potential legal liabilities of directors, board members and other employees in a management/supervisory capacity. This insurance cover protects the personal assets of the directors and officers and compensates them for settlements and legal expenses resulting from suits and litigations arising out of decisions taken by them to manage the business.

This policy will also extend coverage to the business entity itself. One or more directors may be looking for D&O insurance before joining the Board of your business. This is to make sure that enough protection is offered by your business to cover any legal liability arising out of a management decision made by them later on. Therefore, if you want to attract some directors of high pedigree to your organization, it’s time you opt for D&O insurance, in case you are not having one already.

  • Cyber liability insurance

Cyber insurance is a policy that includes liability insurance and is intended to reduce the financial risk exposure of individuals and businesses. It accomplishes so by covering the costs of damage and recovery caused by a data breach, a cyber security incident, or a ransomware attack. It also covers the costs of fines for noncompliance, forensics, crisis communications, lawsuits, investigations, customer refunds and even extortion payments. Cyber insurance has evolved of late as dedicated insurance coverage and can now cover different types of losses originating from different types of cyber-attacks and threats.

Most businesses these days rely heavily on internet-based technology to reach out to their customers and pursue their digital marketing goals. But, do keep in mind that all digital tools can potentially expose your business to cyber threats. The most frequent risks in this category include malware and ransomware assaults, along with compromised credentials, business email penetration, phishing, cloud misconfiguration and vulnerability in third-party software. Therefore, you would surely agree that data security should be one of your primary responsibilities if you are running a business and are having access to the users'/customers' confidential information. Considering everything discussed above, you should adopt a cyber insurance policy, if you have not opted for one yet.

  • Employment Practices Liability Insurance(EPLI)

As soon as your startup begins to hire, you should consider EPL insurance. EPLI can shield your organisation against employment-related litigations such as discrimination (based on pregnancy, age, gender, religion, and so on), sexual harassment, failure to promote, wrongful termination and other issues. EPLI is frequently paired with D&O insurance to form what is termed a "management liability policy."

  • Group health insurance

Health insurance is not just for large corporations any longer. It is also critical for startups and small enterprises to attract and retain top people and maintain the company's momentum. Offering group health insurance policy advantages to your employees allow you to provide health insurance at a lower cost while also improving morale and productivity. Insurance companies offer outstanding group health plans for budding startups to offer to their employees. This can also include coverage for the employee's dependents. The group insurance policy normally covers inpatient treatment and sickness diagnosis, as well as hospital accommodation and nursing costs.

  • General Liability Insurance

General Liability Insurance is one of the most popular types of commercial liability insurance. It provides basic protection and is frequently coupled with various liability insurance, as opposed to specific liability coverage. General Liability Insurance protects a business financially if it is sued for an injury or accidental death on its premises. Such injury or death should result from inflicting an advertising injury (such as copyright violation, defamation or libel), or from damage to a visitor's property. It covers the business's legal liability to third parties as well as expenses such as attorney fees, costs of judgments and settlements related to a lawsuit, medical expenses of the injured third party, and similar monetary damages.

General Liability Insurance is commonly regarded as necessary in light of the exceedingly volatile liability environment. This insurance covers anyone participating in business activity, including owners, directors, and managerial personnel. Please keep in mind that being a small startup or growing business does not make one immune to potential lawsuits. General liability coverage can be a crucial component of risk management for small businesses, at an affordable cost. It becomes even more essential for a startup in the following scenarios-

  • If it operates at a location open to the public
  • If it works closely with clients or customers
  • Manages the property of a client
  • Rents or owns a commercial property
  • Errors & omissions insurance ( E&O) insurance

E&O insurance should be considered by any startup that delivers professional services and consulting - based on professional experience. E&O insurance protects you against claims for damages originating from technology services you provided, and your clients and partners will usually require it. As the technology industry expands, certain companies will increasingly need a technology E&O policy. These include companies that provide web development, software as a service (SaaS), payment processing, and other services that handle sensitive data.

  • Asset Insurance

There may be several options in this category to assist you to secure your business assets-

Property insurance - Here, you can opt to insure either the building structure or the contents therein, or both. This will safeguard you in the event of a tragedy such as a fire or theft. You can also select to insure a specific item that is important to your startup's operations.

Auto Insurance- To protect against damages caused by accidents, you can insure any vehicles you use for your startup, with either comprehensive or third-party insurance.

  • Product liability insurance

If your firm produces or sells a faulty product, you may face legal consequences. Product liability insurance protects you and your business from legal and financial liabilities. However, these liabilities may arise from allegations that a product you developed or sold caused bodily harm or property damage to someone else. In product liability lawsuits, manufacturers are more frequently held liable. Distributors and sellers, in addition to manufacturers, can be held liable for false product claims.

  • Fiduciary Liability Insurance

If your startup provides employee benefits such as health insurance, and stock options, you will most likely have a person or a team of employees in charge of these programs. Fiduciary liability insurance protects your organisation and its employees in the event that someone in charge of these benefits makes an error for which they can be held liable. Fiduciary insurance protects your company from allegations of mismanagement and legal liabilities resulting from their duty as fiduciaries. It will cover all defence costs linked with claims of errors and breach of fiduciary duty.

In addition to the critical insurance policies we have highlighted above, your startup may consider adopting certain additional policies as mentioned below-

  • Workers Compensation Insurance

Employers are legally required to employ reasonable measures to ensure the safety of their workplaces. Accidents do happen, however. When they do, workers' compensation insurance covers them. Workers' compensation insurance has two functions: It ensures that injured workers receive medical care and compensation for a portion of the income they lose while unable to return to work. It typically shields businesses from lawsuits brought by employees injured on the job. Workers are entitled to benefits regardless of who caused the accident. If a worker loses his life on the job, this insurance will pay out death benefits to the victim's dependents. The Workmen Compensation Act 1923 makes it mandatory for Indian employers to compensate their employees for any work-related injury or disability.

  • Business Owners Policy ( BOP)

Startups in the growth stage with fewer than 100 employees can typically obtain a business owners policy (BOP). It may include commercial property insurance, general liability insurance and business interruption insurance. If your startup has office property, these coverages will protect you from third-party property damage and bodily injury claims. They can also provide financial assistance for repairing or replacing damaged equipment and property.

  • Commercial crime insurance

A business crime policy will compensate your startup if it loses money, securities, or other tangible property as a result of criminal wrongdoing. It includes robbery, employee theft, wire transfer fraud, and other crimes.

  • Key person insurance

If your startup has a key employee who is critical to its success, or a leader without whom the startup would suffer both monetarily and reputationally, key person insurance should be considered. This is essentially a life insurance policy for a person who is absolutely irreplaceable in your startup.

What is the Cost of Start-up Insurance

What is the cost of startup insurance?

Because no two startups are the same, not every startup requires the same level of protection. This also means that there is no set price for all growing companies when it comes to insurance. However, while estimating initial premiums, insurers take several significant criteria into account, including the following:

  • Size of your startup- How many employees do you have? What is the size of your office? Do you have several office premises? Do you have any company vehicles? The larger your startup, the more you will have to pay to adequately insure it.
  • Type of Business- The types of products and services your startup provides might also influence insurance costs. A startup that offers a cloud computing service and needs to protect the data of thousands of other enterprises, for example, will spend far more for cyber liability insurance than a startup that sells hardware.
  • Industry- The industry in which you operate can have a significant impact on your insurance costs. It will primarily depend on the amount of risk associated with the specific segment in which your startup operates.

The footnote:

We hope the discussion above will help you understand why startups and businesses in the growth stage require insurance. We have also discussed different types of coverage a startup may consider and the factors that influence the costs of the insurance packages. For the best recommendation on any insurance, you may contact BimaKavach. Here, you can get the best advice for any insurance product in just 5 minutes.