Why Does a Startup Need Business Insurance?
Businesses need startup business insurance in order to protect themselves against losses that could reasonably and foreseeably arise as a result of ordinary, day-to-day business activities.
This may relate to:
- Bodily injury in the workplace
- IP violations
- Executive risks
- Data breach
“Business insurance” is a general umbrella term that is used to cover an extremely large pool of policies (e.g., general liability insurance, professional liability insurance, etc.). The number and type of policies that you will need to “fully” protect your business will depend on several factors, including your business’s size and industry.
Having said that, a few startup business insurance policies are generally recommended and/or required regardless of your business’s specificity (e.g., workers’ compensation insurance, general liability insurance, etc.).
This can also depend on your business structure — especially when comparing formal (e.g., limited liability companies, corporations, etc.) and informal (e.g., sole proprietorships, partnerships, etc.) business structures.
All in all, you should consider speaking to a specialized insurance agent in order to receive professional advice on what type of insurance policies are needed for your business and what coverage policies you can do without.
Let's Find the Right Coverage for your Business
Next Insurance is a fully online provider dedicated to low-cost, high-protection coverage for small businesses. Get a quote instantly.
Different Types of Business Insurance
There are many different types of startup business insurance that you can purchase to protect yourself from liability:
General Liability Insurance
General liability insurance, also known as business liability insurance, is a “general” liability that protects business owners against liability that could arise as a result of conducting ordinary, day-to-day business activities.
For example, it can be used to protect yourself against:
- Medical damages
- Attorney fees
- Lawsuit claims and settlements
- Abuse coverage
However, keep in mind that general liability insurance does not cover medical damages that relate to employees (i.e., employee injuries) or punitive damages that arise as a result of intentional acts.
Professional Liability Insurance
As the name suggests, professional liability insurance has been specifically designed for “professionals” (e.g., consultants, attorneys, accountants, etc.). This type of insurance protects businesses and individuals from damages that may arise as a result of negligence, omissions, errors, and malpractice.
Such damages can include:
- Attorney fees
- Court costs
- Investigation expenses
- Bodily injury
- IP injuries (e.g., copyright infringement, slander, etc.).
Data Breach Insurance
Data breach insurance is designed to protect businesses from any damages that may arise as a result of experiencing a data breach or data theft, as well as allow them to respond to a data breach as fast as possible.
This is important for businesses that have access to their consumers’ personal data, as digital privacy is a relatively litigious area of the law and such breaches can give rise to excessive damages.
Cyber Liability Insurance
Cyber liability insurance is similar to data breach insurance, but it varies in that it offers more protection. Cyber liability insurance covers damages from a cyber breach and provides legal protections, whereas data breach insurance only covers monetary damages.
Some of the types of costs that may be covered by cyber liability insurance include:
- Setting up a call center for affected individuals and allowing them to obtain additional information
- Legal expenses
- Active protection from cyber attacks
- Providing credit monitoring services: This may be a requirement depending on your state
Every state has such a data breach notification law. As a result, data breach-related insurance protections are very common in E&O policies.
Commercial Crime Insurance
Commercial crime insurance covers crime-related losses that may arise as a result of:
- Employee dishonesty
- Computer fraud
- Money and securities
This type of insurance is useful when it comes to protecting businesses against dishonest and libelous acts that may be committed by their employees.
Fiduciary Liability Insurance
Fiduciary liability insurance covers businesses and employees which are engaged in fiduciary roles. Fiduciaries are responsible for selecting advisors and planning investments in a way that is solely in the interest of plan participants and beneficiaries — rather than the actual company.
Fiduciary liability insurance can be used to cover the following scenarios:
- Giving negligent advice on how to invest employees’ retirement plans
- Making recklessly risky investments
- Making improper changes in benefits
- Making errors in administering plans
Keep in mind that this liability usually does not extend to third parties (e.g., out-of-company consultants, administrators of benefit plans, etc.).
Directors and Officers Insurance
Directors and officers insurance (D&O insurance) covers the cost of legal claims made against a company’s directors and officers by other:
- Other third-parties
Directors and officers have specific responsibilities and duties when it comes to their positions. If these are not adhered to and complied with, legal claims can arise that relate to both civil and criminal law.
Directors and officers insurance can cover the costs associated with your business’s directors’ and officers’ legal defenses, as well as the costs associated with compensating the aggrieved side — should a court declare that this needs to happen.
Depending on the insurance policy in question, D&O coverage can also include intellectual property claims made against your directors and/or officers.
Technology Errors and Omissions Insurance
Technology errors and omissions insurance (tech E&O insurance) is meant to cover costs that arise as a result of:
- Failure or error in a business’s technology product(s) or service(s)
- Sensitive data breach
- Software platform(s) downtime as a result of a technical error
Besides attorney fees and defense costs, tech E&O insurance can help you cover:
- State-wide notifications (these may sometimes need to be sent to each individual in question)
- IT forensic investigations
- Settlements and/or compensation schemes
Executive Risks Coverage
Executive risk coverage targets the multifaceted nature of risk associated with running and/or managing a business.
From decision-making to supervising employee activities and handling fiduciary duties, there will be a certain element of risk for each role within an incorporated organization (e.g., plan administrations, directors, fiduciaries, etc.).
Any libelous activity that arises may extend beyond the company’s assets and affect the assets of managers. This is the case even if a mistake was not made by them personally but by another co-manager.
Policies that cover executive risks include:
- Fraud Insurance
- Directors & Officers Liability
- Employment Practices Liability (EPL)
- Initial Public Offering (IPO) Insurance
- Liability for Pension Funds
- Extortion Liability
- Professional Negligence Insurance
Workers’ Compensation Insurance
All states besides Texas have enacted workers’ compensation laws that require private employers to obtain workers’ compensation insurance in order to operate as a legitimate business.
Workers’ compensation insurance covers costs that arise as a result of an employee-related loss. This could relate to:
- Medical damages
- Loss of income
- Disability benefits
- Death benefits
- Wrongful termination
Workers’ compensation insurance is subject to a few limitations:
- Only relevant if the injury or loss was caused while on the job and while performing their contractual duties.
- Does not cover damages that result out of an employee’s negligence or reckless behavior (e.g., while under the influence of drugs or alcohol, etc.)
- Does not cover damages that arise as a result of employees not following company protocols correctly.
- Not all industries and workers are protected by workers’ compensation depending on the state (e.g., domestic servants, farm labor, etc.).
Frequently Asked Questions
What is the best startup business insurance?
The best startup business insurance will depend on the following factors:
- Ease of use (How easily and fast can you get insured with each provider?)
- Quote mechanism (Almost all providers on the list offer free quotes within only a few minutes.)
- Reputation (How well have providers settled insurance claims in the past?)
Check out our review of the best business insurance for startups for more information.
Am I required to purchase workers’ compensation coverage?
Yes. You are legally required to purchase workers’ compensation insurance in all states besides Texas if you want to hire employees.
Do I need startup business insurance?
While you may not necessarily “need” business insurance, it can be very beneficial for small businesses from a sustainability and growth standpoint.
Since most startup business insurance coverage policies are relatively affordable, it makes sense to take reasonable precautions to ensure that your business does not accrue significant debt (e.g., as a result of a claim or settlement, etc.) and become insolvent in the future.
At the same time, some business insurance policies can be used to protect your personal assets from liability (e.g., LLC insurance, executive risks, etc.).
For more information, see our guide on when you should get business insurance.
How much does business insurance cost?
How much business insurance will cost for you will depend on several factors:
- How many coverage policies are you purchasing?
- What types of coverage policies are you purchasing? Some are more expensive than others.
- What’s your risk profile? Have you been involved in other claims or settlements in the past?
- How liquid is your business?
- How risky is your business’s industry?
Generally speaking, you will need to request a quote from your preferred insurance provider for each insurance policy. They will be able to assess your business’s specificities and give you an accurate estimation of your monthly or annual fees.