Which insurance does my startup need?
By Kevin Vela
At some point in time, the topic of insurance will come up. Every startup and small business will need insurance, and for a mature business, an insurance guy is one of the four pillars of your business.
We’re by no means insurance experts here, but we want to outline a few common types that you’re likely to run into as you build your business.
I’m also going to use our law firm (a professional services business) as an example for when we do and do not need coverage.
Commercial General Liability
Commercial General Liability, oftentimes known as “CGL,” is a standard insurance policy issued to business organizations to protect them against liability claims for advertising, bodily injury, personal injury, and property damage arising out of premises, operations, products, and completed operations. It’s generally pretty comprehensive, though there are lots of exclusions.
At VW our landlord requires us to carry a CGL to protect us and the landlord against premises liability (i.e. a slip and fall in our office).
Property & Casualty
Property and casualty insurance is insurance that protects against property losses to your business, home or car, and against legal liability that may result from injury or damage to the property of others. This type of insurance can protect a business against losses stemming from the insured physical property.
We carry property insurance to cover our assets inside the office – mostly computers and electronics, and some artwork.
Cyber Liability Insurance Cover
The term “cyber liability insurance cover” is often used to describe a range of products, and it covers information security related tools, processes, and services. These may include:
- Data breach/privacy crisis management coverage. For example, expenses related to the management of an incident, the investigation, the remediation, data subject notification, call management, credit checking for data subjects, legal costs, court attendance, and regulatory fines. I.e. – if someone hacked into our records and stole confidential client information.
- Multimedia/media liability coverage. Third-party damages covered can include specific defacement of a website and intellectual property rights infringement. An example for our firm would be someone stealing our original content on our website.
- Extortion liability coverage. Typically, losses due to a threat of extortion, professional fees related to dealing with the extortion.
- Network security liability. Third-party damages as a result of denial of access, costs related to data on third-party suppliers, and costs related to the theft of data on third-party systems.
At VW, we carry a modest cyber liability policy. You just never know.
Malpractice insurance (also called “professional liability insurance”) is purchased by professionals, most often medical and legal professionals, to financially cover them in the event they are sued for malpractice. Malpractice is the act of causing damage or injury to a person or persons as a result of negligently performing a professional duty or intentional wrongdoing. Doctors, surgeons, nurses, and most other medical professionals are sometimes required to purchase malpractice insurance before becoming employed by a facility or opening a private practice.
At VW, we carry legal malpractice insurance, though thankfully we’ve never had to use it!
Errors & Omissions Insurance (“E&O”)
Errors and omissions insurance (“E&O”) is a type of professional liability insurance that protects companies and their workers or individuals against claims made by clients for inadequate work or negligent actions. Errors and omissions insurance often covers both court costs and any settlements up to the amount specified by the insurance contract. It’s not uncommon for larger companies to carry this, especially in services firms (think consulting firms).
Workers’ compensation is a form of insurance providing wage replacement and medical benefits to employees injured in the course of employment, in exchange for mandatory relinquishment of the employee’s right to sue his or her employer for the tort of negligence. It serves two purposes: It assures that injured workers get medical care and compensation for a portion of the income they lose while they are unable to return to work and it usually protects employers from lawsuits by workers injured while working. Some states mandate worker’s comp. Note that Texas does not.
Business Automobile Insurance
A business automobile insurance policy covers a company’s use of cars, trucks, vans, and other vehicles in the course of carrying out its business. Coverage may include vehicles owned or leased by the company, hired by the company, or employee-owned vehicles used for business purposes. Examples of business automobile insurance span a wide range of uses, such as traveling between different work locations, visiting customers, or driving around other employees. We see a lot of landlord leases that try to force an office tenant to carry business automobile insurance. If your employees are not driving company vehicles and are not driving their vehicles for company purposes, you likely don’t need it.
Director’s & Officer’s (“D&O”)
Directors and officers liability Insurance (often called “D&O”) is liability insurance payable to the directors and officers of a company, or to the organization(s) itself, as indemnification (reimbursement) for losses or advancement of defense costs in the event an insured suffers such a loss as a result of a legal action brought for alleged wrongful acts in their capacity as directors and officers. Coverage can extend to defense costs arising out of criminal and regulatory investigations/trials as well, and often civil and criminal actions are brought against directors/officers simultaneously. Intentional illegal acts, however, are typically not covered under D&O policies. This type of coverage is a must for any later stage startup.
Key Person or Key Man
Key person insurance (also known as “key man insurance”) is a life insurance policy that is owned by a business to insure a key employee. The company pays the premiums and is also the beneficiary. If the key employee dies, the policy death benefit can be used to cover the company’s essential business expenses, such as salaries, overhead payments, and loan payments, while the company gets back on its feet. Key person insurance can also be used to help cover the cost of finding a replacement for the key person, or as a payment to the key person’s heirs so that the business can repurchase that key person’s equity. In the venture financing world, most Series A financing rounds require key man insurance on the founder(s). It’s not uncommon to see it at the Series Seed stage.
Employment Practices Liabability
Employment practices liability (EPL or EPLI) is a type of insurance that protects companies against employees alleging claims of discrimination (based on race, sex, disability, or age), harassment, wrongful termination, or other types of employment-related issues. Companies are at risk of an employment claim the moment they interview a prospective employee. Additionally, small or new businesses are often the most vulnerable to employment claims because they lack either a legal department or employee handbook that provides a guide to hiring, terminating, or disciplining employees. The cost of EPLI depends on factors such as number of employees, percentage of employee turnover, if there have been prior suits, and whether you have established rules & practices in place.
The above is just a primer on some types of insurance coverage that may make sense for your business. This is not legal advice, and we are in no way experts on the matter. Rather, this blog is meant to be an introduction to get you thinking about it. Please reach out to a business insurance professional. A good one will invest his or her time with you to learn your business and make recommendations for you.