Does My Startup Need Insurance?
There are common company milestones that trigger the need for your startup to carry insurance even if your startup is in the very early stages. Regardless if your product has launched or not and whether you have revenue or not, your startup may still be required to carry insurance either legally or contractually.
Below are some common milestones when your startup should consider purchasing insurance even if you’re in the early stages.
When you hire an employee, paid intern, or an independent contractor.
You may be required by law to carry a workers compensation policy (commonly referred to as “workers comp”) for all employees, paid interns, and independent contractors depending on which state you're operating in. In the majority of states carrying workers comp is a legal requirement. California is one of the most strict states which requires all businesses regardless of size to carry workers comp for all employees, paid interns, and independent contractors who don’t pass the new “ABC” Test. Learn more about the ‘ABC” test for independent contractors here. If you’re in California and have even 1 employee, not carrying workers comp coverage can put your business at risk for hefty fines and noncompliance.
Common Question: “Well, what happens if we don’t carry workers comp?”
- In California failing to comply with the regulation is a criminal offense. It is a misdemeanor punishable by imprisonment in the county jail for up to 1 year, and/or by a fine of up to $10,000. (The fines can go up to $100,000 if an employee is injured while the company did not have a workers comp policy.) You can read the full description from the CA Department of Industrial Relations under “Can I be fined for not carrying workers’ compensation insurance” here.
Common Follow-up Question: “How will they know if we don’t have workers comp?”
There are a few common ways your company can be spotted for non-compliance.
- Your business can be visited anytime from the DLSE (Division of Labor Standards Enforcement) and be asked to provide proof of workers comp coverage. These surprise visits are becoming more common in California for businesses of all sizes.
- Being reported. Anyone can report your business for not carrying workers comp. Often times it can be an employee, independent contractor or other who has come in contact with your business and learned you are not carrying workers comp. It is very easy to report to the Division of Labor Standards Enforcement.
- Your employee, paid intern or independent contractor (in CA) gets hurts on the job and learns you don’t have a workers comp policy. In this scenario, you may face heavier fines. The fines can go up to $100,000 if an employee is injured while the company did not have a workers comp policy. Also, the employee, paid intern or independent contractor (in CA) can potentially also sue your business for bodily injury. This is something they would not be able to do if their injury was taken care of through the worker's comp policy since the worker's comp policy typically waives this right.
When you sign a new office lease or co-working space membership.
A lease agreement often includes insurance requirements and contractually requires you as the tenant to comply with them. A landlord will typically require your company to provide a “Certificate of Insurance” to show proof your company is carrying general liability coverage. Your startup will need to purchase a general liability policy in order to meet this contractual agreement. Some well-known coworking spaces will require general liability & property coverage with business income coverage. You can purchase a general liability package or business owners policy to fulfill this requirement. You can learn more about these policy types here. Carrying this insurance policy will be a requirement for every year you are leasing the space. The goal of the landlord is to protect his/her property against damage caused by your business and protect against liability.
Many landlords will also require your company to also name them as an “additional insured” on your company’s general liability policy. This is can be added onto your policy as a specialty request to your insurance carrier. There can be an additional cost associated with this. A pro tip: purchase a “business owners policy” from an insurance carrier who includes a “blanket additional insured” wording in their policies. That way you won’t have to pay any additional premium for this special wording for a certificate of insurance requirement.
Common Question: “Can I even afford this type of insurance?”
The good news is if your business is fairly new and has modest sales, this type of business insurance will be super affordable. The reason being is most general liability policies premium are based on estimated gross sales. Another common factor to calculate the premium is on the square footage of the office/working space. In both cases, there is a high chance for a new startup or small business, there will be modest sales and limited square footage of office space/coworking space. A general liability policy can start around $250 annual premium (12-month policy- roughly $21/month). A business owners policy can start at $425 annual premium (12-month policy- roughly $35/month).
When you sign/sell to your first client.
You signed your first client, congrats!! You have worked hard to build your startup to accomplish this milestone. It is now important to protect what you have built. The proper business insurance policy will protect the company from liability brought from your product or service. If your selling to larger more established clients, they may contractually require you to carry some form of general liability, product liability and/or professional liability before the deal can close. Regardless if there isn’t a contractual requirement asking the company to carry insurance, it is really important to protect the entity and its officers from liability brought from lawsuits. As you continue to add new clients your startup’s exposure to potential lawsuits increases. Entrepreneurs tend to be optimistic and think their business will not be sued. The truth is regardless if your startup is at fault or not, it can be sued and there is an expense to defend your business in court. This is where business insurance comes into play and can help save your business.
Common Question: “What type of coverage do I need to protect my startup?”
Identifying what type of coverage your startup needs is paramount to do sooner than later. Here is a list of the type of business insurance policies you can purchase to protect your startup with laymen’s explanations of what the coverage will protect your business from.
If you have specific questions about which business insurance policy is best for your startup and want to schedule a free 25 min consult AMA Style, you can schedule it here.
When you start selling your product(s)/service online.
If you are selling you’re product(s) or service direct to consumer through your website it is important to make sure you have business insurance in place before you make your first sale. Even at one client, you have exposure for a potential lawsuit.
Whether you are selling a product or service, it is also wise to have a business owners policy that includes data breach coverage especially if you are collecting any personal information such as email addresses for a newsletter or collecting payments on your website. Even if you are using a third party service to collect payments it is important to have data breach coverage as your client will name your company in a suit if the data breach occurred on your website. If a data breach occurs each state has its own laws about what responsibilities a business has in terms of notification costs and credit monitoring for those affected.
If you’re selling a physical product it is important to have product liability.
Product Liability coverage protects your business against claims of personal injury or property damage that are caused by the product(s) sold or supplied through your company. Even if your startup is not the manufacture of the product, your company carriers the liability since your company is who the client is purchasing the goods from. The client doesn’t know your manufacturer is or if you manufacture the products in house. They only know you're the company they purchased the product from and will name your startup in a lawsuit since your startup is who they bought the product from. There is a cost to defend your company even if you are not at fault or believe to not be at fault. This is where a lot of startups are naive. They think since they are not the manufacture of the product they don’t need to carry insurance themselves. This is not true. It is important for your startup to carry the product liability and in the event of a claim (aka lawsuit), your insurance carrier will cover the cost to legally defend your startup against the claim. If the manufacture of the product is in the US, the insurance carrier will be able to subrogate against the manufacturer for damages. Pro-tip: It is a good idea for your startup if you use a US-based manufacturer. It will help lower your cost of product liability premium for the insurance carrier’s ability to be able to subrogate against the U.S. manufacturer. (Subrogate refers to the legal process in which the insurance company will eventually sue the party at fault in order to recover the funds the insurance company has already paid.)
If you’re selling a service it is important to have professional liability.
Professional Liability can also be referred to as Errors & Omissions (commonly abbreviated to E&O). This coverage covers your company if you’re found to be negligent in the professional services your company provided. How could professional liability coverage be triggered? If your client sues your company for a negligent error made in the professional services provided to them. It can be for an error or omission in professional services which causes harm to your client.
Easy to remember guide:
- If you sell a product: you need product liability + business owners policy + data breach
- If you sell a service: you need professional liability + business owners policy + data breach
When you’re building software.
If your startup building your own software in house, you will need to purchase a Technology Errors & Omissions Policy. This is commonly referred to as Tech E&O. You will also need to purchase a Data Breach/Cyber Liability.
Whether you are offering your software on a freemium model or a paid subscription model, you will need this coverage to help protect your startup from liability.
Tech E&O is a common contractual requirement by partners & larger clients. Why is this coverage so commonly required for Tech companies? Think of the case when your technology fails what would be the repercussions? What would be the potential damages to your clients? When technology fails it could result in a financial impact to the company using the tech especially if the tech is helping provide a core function of their business. It is very common for companies to sue their technology product providers for errors caused by the technology. The general liability policy would not provide coverage for technology companies if their product fails or causes errors. It is very common for technology companies in the following segments to purchase this coverage: software, information technology, hardware & electronics manufacturing companies. For B2C tech products, the greater number of users you have the more your exposure of liability grows. It is important to carry Tech E&O for B2C companies as well.
Cyber Liability is also equally as important to protect your startup from in the event of a data breach. We cover this in more detail below under “If you process or store any client, employee, or patient data”. You can also read more about this coverage here under “ Cyber Liability & Data Breach”.
Pro-tip: When you’re an early stage startup a way to be more capital efficient is to purchase a combined Tech E&O & Cyber Policy with shared limits. This means both coverages will share the limit of liability. This will make the premium more affordable. However, as you grow you will need to increase the limit of liability to adequately cover your risk. As the number of users or revenue grows, increase the policy limit.
When your product starts to be carried by a retailer or e-commerce site.
Similar to when you sign a big name client, big-box retailers or well-known e-commerce sites/platforms will require your startup to carry business insurance contractually as apart of their standard agreement before they will carry your product in stores or on their website. Common insurance requirements will include general liability and product liability. Some larger companies may also include workers comp as a requirement. As well as additional special wording such as requiring to name them as an additional insured (on your general liability policy) and/or a waiver of subrogation (on your worker's comp policy). The key risk they will be worried about the liability that results from your product and how to mitigate their own risk resulting from it.
Pro-tip: If you need help deciphering what business insurance is being required of your startup and what it will cost, send us an email at hello@beemabroker.com with a copy of the “insurance requirements” section of the agreement and we can help. We have also been successful in helping our clients negotiate lower limits and eliminate requirements that are excessive.
When you close a fundraising round. Even a “friends and family” round.
Congrats on closing a round of fundraising! It is important to make sure you have a Directors & Officers policy in place. This is a good practice even if you are just getting started and raised a “friends and family” round. Once you start approaching institutional financiers such as VC’s or family offices, many will require your startup to carry a Directors & Officers policy. This policy provides protection for the Director’s & Officers of the company. You can learn more about Directors & Officers coverage here.
If you process or store any client, employee, or patient data
If you process or store any private & sensitive data belonging to your clients, employees or patients it is important to consider Data Breach or Cyber coverage. Essentially every business interacts or collects sensitive client and employee data. Each state has it’s own rules and regulations of what is required of the business has to do when a data breach occurs. Often times these rules are confusing and when a breach occurs it is time sensitive on how a business needs to respond. When purchasing a data breach policy most carriers includes a claims hotline that walks the business owner through exactly what steps need to be taken. They also provide ongoing education on how to protect your business from a data breach.
What is considered PII (Personal Identifiable Information)? The US Department of Labor defines it here. It can include name, address, social security number, identifying number or code, telephone number, email address. PII also picks up data that is used to identify an individuals gender, race, birth date, geographic indicator, etc. Client credit card and debit card information is also vulnerable to data breach attacks. If you're in the healthcare industry you’re probably familiar with HIPPA laws. If your startup is collecting emails from your landing page for a subscription list, you can have an exposure.
Data Breach coverage will help pay for notification expenses to impacted customers, employees & government agencies, good faith advertising post-breach, & credit monitoring. Each policy will highlight what they will be covering and what triggers coverage so it is important to ask questions where you are unclear. You can learn more about what data breach/cyber insurance will cover here.
When you start publishing a company blog.
Mostly all startups today have a company blog that they either host on their website or another blog site. A general liability policy can help protect the company from any lawsuits pertaining to copyright infringement, libel, slander, & misappropriation of advertising ideas. This coverage would be found under the “personal & advertising injury” limit. The most common case for startups is copyright infringement. It is mostly unintentional. Most content creators are not intending to infringe on someone’s copyright. Common traps are the unauthorized use of a picture, logo, trademark, etc. If you are using open source pictures make sure you are allowed to copy, modify, & distribute them. Surprising to most, crediting the author or source doesn’t rid of potential copyright infringement exposure. If you have guest contributors on your blog it is important to have a prerequisite in writing that they only provide original content and photos they have ownership or have the rights to use. If you want to learn more about potential copyright infringement liability your blog could face, here is a good article.
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If you're wondering if your startup needs business insurance, we can help!
- You can book one on one time with our experts to answer questions you have specifically about your startup. Book a free 25 minute AMA style call here.
Important Disclaimer: This is general information for educational purposes only. Each insurance carrier has their own specific policy language which dictates what their specific policy will cover. It is important to read your policy and ask questions on any language you are not clear about.
If there is a specific question you would like to have answered please email us at hello@beemabroker.com and we will be happy to help!
