Oct. 20th, 2020 - Murphy's First Law
“Needing insurance is like needing a parachute. If it isn’t there the first time, chances are you won’t be needing it again.”
Insurance is a big ugly topic. It is one of those costs that feels like a waste until the day you need it.
When founding or starting a company, most people only spend time thinking about shipping and selling product — they don't think about the day they are hit with a multi-million dollar lawsuit from a former employee.
"Hiscox reports that one in five small or medium-sized businesses will face employment charges with an average cost to defend of $125,000".
The last position you want to end up in is paying $1250 per hour legal fees because you didn't read the fine print.. "[M]ake sure your policy is flexible enough to allow you to pick your own attorney. The insurance company’s goal is to spend the least amount of money, which means the lawyers they appoint might not be your first pick."
You need insurance, but be wary of how you select coverage. Before we talk about where to grab insurance for your business, let's do a breakdown of the 8 types of insurance your startup likely needs:
Professional Liability or Comprehensive General Liability
- What it does: This is the most basic form of business insurance and protects you against liability for product usage that causes physical damages (property, bodily).
- When you need it: Day 1. Once your company becomes a legal entity, you will want to get some form of General Liability or Professional Liability
- What amount of coverage to purchase: $2M total coverage is a standard starting point for a small business.
- What it costs: starts at $500 per year
Errors & Omissions (E&O) Insurance
- What it does: Protects against claims against you that are caused by system issues or work provided to customers that result in financial harm to your customer. Almost all major SaaS enterprise contracts will require some type of E&O coverage
- When you need it: The moment your platform or product is live and handling customer transactions or data. It is fine to wait until launch dat to secure E&O as this type of insurance policy can be set up to cover based on when the claim was made and not when the actual event happened.
- What amount of coverage to purchase: This is heavily based on the revenue of your company, size of customer contracts and sensitivity of processes or systems your product or service deals with. You should work with your agent to determine the right level of coverage.
- What it costs: Starts around $2000 per year
Workers Compensation Insurance
- What it does: This will cover costs of employee injury on the job.
- When you need it: For founders, the moment you decide to make your first hire you should get setup with Workers Comp Insurance. At a certain size, it is required by law to carry workers comp insurance (typically 3 or more employees, but in California you will need it for your first employee).
- What amount of coverage to purchase: Start at $750k to $1M.
- What it costs: $400-600 per employee per year
- What it does: Once your business has a physical presence or storefront anywhere you will want to investigate whether you need property insurance.
- When you need it: Typically any company that has warehouses, owns office space or in some cases, lease offices. Property insurance is occasionally required as part of the terms to lease or sublease a space. It is strongly encouraged if you own any physical properties (warehouses, land, offices) that you acquire Property insurance.
- What amount of coverage to purchase: Coverage amount will vary based on lease terms or size and usage of space.
- What it costs: Highly variable on the space you own or lease - speak with an agent.
Employment Practices Liability Insurance (EPLI)
- What it does: Covers costs for defending against lawsuits or paying out settlements and judgements in employment related cases.
- When you need it: In conjunction to workers comp, EPLI can cover employment claims made against the business of several kinds (e.g. harassment, discrimination). Typically, businesses will get EPLI as they move into the >10 employee range.
- What amount of coverage to purchase: Around $1M
- What it costs: $4500-10,000 per year
Cyber (Data Breach) insurance
- What it does: This insurance will cover any costs that are incurred as a result of defending or investigating a data breach. If you get hacked, this will prevent your company from completely losing their shirts as a result of legal fees, customer clawbacks, operational expenses from investigations etc.
- When you need it: The second you start storing customer, client or employee data.
- What amount of coverage to purchase: Similar to E&O, this will be highly variable on the types of data you store on behalf of customers and the operating model of your business. Speak with an agent to get a better idea of how much coverage you need.
- What it costs: Starts around $2000 per year
Directors & Officers (D&O) Insurance
- What it does: Covers legal claims against company leadership such as: breach of contract or fiduciary duty, mismanagement, noncompliance with laws and regulations, misuse of company funds, misrepresentations of company assets, and failure to comply with workplace laws.
- When you need it: If you are seeking your Series A or above you will likely be required to show proof of D&O insurance. Additionally, as your company scales and has more public facing communications you will likely want this to cover any issues that arise.
- What amount of coverage to purchase: Around $1M with increases as your business scales
- What it costs: Starts at $5k per year
Key Man Insurance
- What it does: This provides life insurance for individuals that are critical to the function of the business. This typically can be executives or founders whose passing would result in a substantial impact on the business.
- When you need it: Once your business is producing revenue and has a headcount north of 10 employees you should consider getting Key Man policies. Additionally, many Series A or later funding rounds will have a clause that requires proof of Key Man insurance policies.
- What amount of coverage to purchase: At a minimum $1M per Key person. This should be evaluated as the business scales.
- What it costs: Starts at $1000 per year per individual. This will vary widely due to health and other considerations of the individuals you insure.
Where do I get Insurance?
Ok - so now we know what you need. Where do you go for insurance?
First off, you can find a specialized agent or broker for all of the types listed above. Some common places to start are with online brokers that can aggregate quotes for you.
Here are some more tech friendly startups and brokers that are tackling the process of buying and managing your companies insurance policies:
There are also plenty of big players in the space as well such as:
- https://www.biberk.com/ (Berkshire Hathaway)
- https://www.thehartford.com/business-insurance-landing-page (The Hartford)
- https://www.hiscox.com/small-business-insurance (Hiscox)
- https://www.chubb.com/us-en/business-insurance/ (Chubb)
Side note: The difference between an Agent and a Broker
Agents act on behalf of insurance companies — sometimes one or more— to sell insurance to businesses. Brokers, on the other hand, represents you the business and goes to seek quotes in the marketplace.
When buying insurance you can contact several agents or brokers. It is recommended working with a reputable broker and also getting independent agent quotes to compare prices.
- If you operate a tech startup, at the very least, you need GLI and E&O policies and may be legally required to have Workers Compensation Insurance if you have any employees.
- As your business grows, reevaluate your coverage costs & needs. It is best practice at a minimum to do this annually, if not quarterly.
- Read the fine print. Don't just get as much coverage as possible. You want to make sure coverage terms are what you expect.
Lastly, below is a chart from Foundershield to give you an idea of when in your companies life you should be thinking about these types of insurance:
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