5-minute read
Bank failures like Silicon Valley Bank’s aren’t the only risk facing the typical startup. Day in and day out, a startup typically deals with a range of threats that can unceremoniously and quickly dispatch its founders’ dreams.
Protecting themselves with insurance, however, isn’t often top of mind (or in the budget) for too many entrepreneurs.
The result can be disastrous.
Imagine you’re running an AI-focused startup that decided to forego business insurance and that a malfunctioning computer caused a fire in your office. The result isn’t the loss of furnishings alone, but also critical hardware and your proprietary AI model, which for some inexplicable reason wasn't backed up off-site.
Now your product launch timeline is months behind and the damage to your reputation is spurring investors to defect.
Everything you’ve worked to build is now at serious risk.
Let’s not belabor things. Here are the eight types of coverage every startup will want.
1. General Liability Insurance
This is one of the most common types of business insurance, and for a good reason. General Liability Insurance provides coverage for common risks, including bodily injuries, property damage, or any kind of third-party lawsuit. It's the bedrock of any insurance strategy, protecting you from high-cost liabilities that could otherwise sink a new business.
2. Property Insurance
If your business owns physical assets, such as a retail storefront, warehouse, or office equipment, you should consider property insurance. This policy covers damage to buildings and their contents from events like fires, storms, theft, or vandalism. For those operating out of home offices, don't assume your homeowner's policy covers your business equipment — it often doesn't.
3. Professional Liability Insurance (Errors & Omissions)
Professional Liability Insurance (PLI), also known as Errors & Omissions (E&O) insurance, is especially relevant to businesses providing services. PLI covers claims made against your business due to negligence, errors, or omissions in the professional services you provide. This insurance can be a lifeline for tech startups or consulting firms where a small mistake could result in a significant financial loss for a client.
4. Workers' Compensation Insurance
If your startup has employees, then Workers' Compensation is a must. This insurance covers medical expenses and lost wages if an employee gets injured or falls ill while on the job. In most states, it's legally required once you hire your first employee. Even if it's not mandated in your state, it's still worth considering to protect both your employees and your business.
5. Business Interruption Insurance
A less known but highly valuable type of insurance is Business Interruption Insurance. This covers loss of income due to a disaster that disrupts the operation of your business. It can help you cover operational costs, like rent and employee wages, during a crisis — essential for startups that might not have large cash reserves.
6. Cyber Liability Insurance
Is anyone left who doesn’t understand how important cyber coverage can be? Cyber Liability Insurance covers costs related to data breaches, including notification costs, credit monitoring, fines and penalties, and loss resulting from identity theft. For tech startups or any company heavily reliant on digital platforms, this insurance is crucial.
7. Employment Practices Liability Insurance
Employment Practices Liability Insurance (EPLI) is another crucial yet often overlooked form of coverage for startups. As a startup grows and hires more employees, it becomes exposed to risks such as claims of wrongful termination, discrimination, harassment, and failure to promote. These employment-related claims can have substantial financial and reputational repercussions. EPLI offers protection by covering the legal costs of defending a lawsuit, irrespective of its outcome, and any resulting settlements or judgments. Additionally, it provides access to expert legal counsel.
8. Directors & Officers Insurance
Lastly, Directors & Officers (D&O) Insurance protects the personal assets of your company's directors and officers, as they can be held personally responsible for the company's actions. It covers legal fees, settlements, and other costs. D&O insurance can also improve your company's credibility in the eyes of potential investors, who know their personal assets will be protected. In fact, investors will typically require the business to obtain D&O as a condition of funding.
The bottom line?
Insurance is not an area to be overlooked or underestimated. It provides a safety net for unforeseen circumstances that could otherwise have catastrophic effects on your startup. By understanding and considering these various types of insurance, you can safeguard your entrepreneurial dream and ensure your company is built to last.
The Mahoney Group, based in Mesa, Ariz., is one of the largest independent insurance and employee benefits brokerages in the U.S. An employee-owned organization, we’ve been providing our clients with the confidence to face whatever lies ahead for more than 100 years. For more information, contact us online or call 877-440-3304.
This article is not intended to be exhaustive, nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel or an insurance professional for appropriate advice.