The Startup Founder’s Guide to Insurance

With hundreds of tasks to complete, startup founders have so much on their plate that matters such as insurance often get delayed or even completely overlooked.

As a founder, you might not have the time to sit down with an insurance agency and carefully analyze all the different types of coverage options available to you. Well, don’t worry — this guide covers everything you need to know about business insurance and why you need it. Let’s get your startup insured!

Why You Need Startup Insurance

Getting insurance is one of the most critical aspects of setting up your startup. Although insurance may seem optional, a lack of coverage may leave you vulnerable and open to liabilities and damages that can cost your business thousands of dollars.

Here are a few key reasons you need startup insurance:

  • Financial protection for your startup
  • Legal protection for BODs
  • Protection for your employees
  • Protection for your customers
  • Better standing with investors
  • Protection against criminal activity
  • Peace of mind and much more

Insurance protects you, your business, and any key stakeholders involved in your business dealings, including your employees and customers.

In case of unexpected events leading to heavy losses and damages for your company, a good coverage plan can help you by reducing your liability and costs.

Opting for a well-rounded coverage plan is also necessary to expand your startup. To get funding, most investors require you to have an insurance plan to protect them and their money against any future events. This is especially necessary since the rise in cyberattacks, as anyone who becomes aware of the funding may try to get their hands on the money.

At the end of the day, insurance not only protects your company but also frees you up to run your business without worrying about unexpected events or heavy financial losses. For startup founders, in most cases, insurance is more of an investment than an expense.

6 Types of Insurance Your Startup Needs

If you’re ready to make an investment toward protecting or growing your business, it’s essential to know what types of insurance you can get.

Your startup could require different sorts of insurance. Understanding the many forms of coverage isn’t straightforward, especially for new startup owners.

So, here are six of the most common types of startup insurance and why you need them.

1. General Liability Insurance

General liability insurance — also known as business liability insurance or commercial general liability insurance — is an essential coverage type for owners of startups.

This type of insurance protects your business from claims by clients regarding any personal injury or property damage from your products or services.

General liability insurance gives you coverage against many different types of claims, including:

  • Body injury
  • Property damage
  • Copyright infringement
  • Reputational harm
  • Advertising injury
  • No fault car accident

Not having general liability insurance can leave your company defenseless against these claims and potentially cost you thousands of dollars in legal and settlement fees. Accidents such as slip-and-falls are quite prevalent, and resolving just one body injury claim can cost your business an average of $35,000.

On average, commercial general liability insurance costs small businesses in the US $597 per year or $50 per month. However, this number can change depending on what industry your business is in. For example, companies in construction or transportation may have a higher liability insurance cost due to the increased risks associated with their work.

Although general liability insurance is recommended for most businesses, it’s even more necessary for your startup if:

  • You have a physical location open to the general public or clients.
  • You use a third-party location to carry out your business operations.
  • You carry out marketing and advertising for your business.
  • You need coverage to get investments or work contracts.
  • Your competitors could copy your design or product.

2. Workers’ Compensation Insurance

As the name suggests, workers’ compensation insurance is a type of coverage that extends to employees of a business in case they become injured or ill during work.

Workers’ compensation insurance covers lost wages and medical benefits to employees that are unfit to continue working. It liberates the employer from paying these expenses out of their own pocket. This coverage also protects the employer from lawsuits and claims by workers injured on the job.

In the US, workers’ compensation insurance is generally mandated by the individual states, and the benefits of the coverage tend to vary from state to state. Texas is the only state in the US that doesn’t require a compensation program for employees.

The cost of workers’ compensation insurance depends on the industry your business is in and the state it’s operating in. For example, in California, the cost of workers comp for each $100 of salary is $33.57 for high-risk workers, and 40 cents for low-risk workers.

As a founder, you will need to get workers’ compensation insurance as soon as you hire your first employee. Depending on the laws in your state, you may need to get workers comp even if you’re the sole proprietor of the business as well as for part-time or seasonal employees.

3. Errors and Omissions Insurance (E&O)

Errors and omissions insurance, commonly known as E&O insurance, offers coverage against any claims of neglect, error, or omission that led to financial loss for clients. E&O insurance not only covers settlements but also includes any legal fees, such as court and attorney fees, that may result from client claims.

The cost of error and omissions insurance can vary depending on factors such as the size of your business, the industry you’re in, and even the skill and training level of your employees. The median cost of E&O insurance for small business owners is $65 per month.

As a startup founder, you need E&O insurance if your business is providing a service to your customers, whether it’s a barbershop or a real estate consultancy. In some states, E&O insurance is even mandated by the government. Make sure to always look out for your state government’s policies before forming your insurance plan.

4. Cyber Liability Insurance

Due to a lack of security infrastructure, small businesses are especially vulnerable to cyberattacks. These attacks can steal sensitive information and customer data, including credit card information and social security numbers.

Cyber liability insurance provides your company with cost coverage for any damages resulting from cyber threats and data breaches. Cyber liability insurance covers multiple types of cyber threats, such as:

  • Network intrusions
  • Data breaches
  • Customer and employee lawsuits due to privacy breaches
  • Regulatory fines
  • Ransom payments needed to recover data

Cyber Liability insurance is recommended for all startup businesses, but it can become a necessity if your company deals with sensitive customer information such as medical or financial records.

5. Employment Practices Liability Insurance (“EPLI”)

Employment practices liability insurance or EPLI covers your startup business from claims by employees regarding violation of employees’ rights in the workplace. These claims may include discrimination, harassment, wrongful termination, etc.

Nearly one in five small businesses face legal action from employees. Without coverage, these litigations can end up costing your company thousands of dollars in settlements and legal fees. By investing in employment practices liability insurance, you can protect your business and cover any costs associated with employee litigation.

EPLI is recommended for any company with employees. However, the greater the number of employees in your company, the more essential it becomes to get coverage from employee litigation.

6. Key Person Insurance

Key person insurance is a sort of life insurance that a business takes out on their most important employee or employees.

The basis of key person insurance is that without this one person, the business would be unable to function properly.

In the case of your startup, the key person insurance would be taken out against you, the founder of the business. By getting this type of coverage, you would ensure that the company gets a death benefit in the form of money that can keep the startup alive even after a tragic event.

Endnote

Startup insurance is an essential aspect of owning and operating your own business. As a founder, consider getting insurance as soon as possible because, as they say — it’s better to be safe than sorry!