Top 8 Reasons Why Your Startup Needs Insurance
There are several reasons why you may decide to obtain startup business insurance:
1. Attract Investors
Business insurance can attract investors by minimizing the potential risks that they may face.
At the same time, it can make you look like a more “attractive” investment option because it proves to investors that you recognize the importance of managing risk effectively.
2. Shield Yourself From Legal Liability
Even if you do not operate in a way that warrants a legitimate claim against you, merely covering the costs of a defense against an alleged claim can impose huge financial burdens on small businesses.
It is not uncommon for a startup to face illegitimate claims from larger competitors (e.g., copyright infringement claims, advertising injury claims, etc.) as a way to “set it back.” This is because, even if the claims end up being dismissed, small businesses may have spent tens of thousands of dollars defending themselves along the way.
Startup business insurance (e.g., IP insurance, etc.) can help make you less susceptible to these types of lawsuits and allow you to avoid any situation where your growth is “bottlenecked” as a result of a depleted budget.
3. Comply with Your State’s Laws
While this is not the case for the majority of startup business insurance coverage policies, it can be the case with:
- Workers’ compensation insurance: Businesses with employees are legally required to purchase workers’ compensation insurance in every single state besides Texas. In this context, the term “employees” includes anyone on a payroll — even the owner(s).
- Short-term disability insurance: Even though no state mandates the requirement of long-term disability insurance, there are a few that require a short-term alternative, including California, Hawaii, New Jersey, New York, and Rhode Island.
- General liability insurance: While this is rarely a legal requirement, it can be a practical obligation (e.g., commercial landlords can require general liability insurance in order to lease a property to a startup).
4. Avert Potential Insolvency
As a small startup, you may think that your business is “too small” to face legal complications. In reality, however, a study conducted by the Small Business Administration’s Office of Advocacy found that between 36% and 53% of small businesses have been sued, and approximately 43% have been threatened with a lawsuit.
This is important as even a single claim can cause irrevocable financial damage to your business if it is timed correctly.
Certain startup business insurance policies can help you avert potential insolvency by proactively “safeguarding” you against the risks of conducting business (e.g., executive risks insurance, general liability insurance, D&O insurance, etc.).
5. Recognize the Multi-Faceted Nature of Commercial Risk
The high number of policies included within startup business insurance means that you can protect your business from all angles — including employment, legal defenses, IP rights, and indemnification contracts.
Furthermore, general liability policies (e.g., general liability insurance, professional liability insurance, etc.) have the added benefit of protecting you from liability that may arise as a result of your business unknowingly breaking laws or regulations.
6. Increase Protection Against EPL
If you plan to hire employees in your startup, you should know that employment law is becoming an increasingly litigious area of the law.
Claims that arise in employment law may relate to several different environmental, social, or regulatory practices:
- Diversity lawsuits
- Discrimination lawsuits: These may be based on age, disability, sex, or race.
- Wrongful termination lawsuits
- Employee fraud lawsuits
- Whistleblowing lawsuits
- Lawsuits that arise as a result of health and safety violations (e.g., false statements, etc.).
- Lawsuits that relate to the mismanagement of employee benefits (e.g., trusts, health plans, etc.).
A recent survey by Coalition found that approximately 12% of small companies (i.e., fewer than 100 employees) experienced at least one EPL claim within a two-year period.
Even though this number may seem relatively small, readers should consider that smaller businesses are commonly significantly more vulnerable to EPL claims. This is because, in small businesses, owners are generally more “directly” involved with employment-related decisions (e.g., hiring, terminations, etc.)
7. Protect Yourself Against Cybercrime
Another risk that you may face as a small business or startup is cybercrime (e.g., email fraud, data breach, etc.).
Small businesses tend to be targeted the most when it comes to cybercrime because they very rarely have any adequate protections to prevent this from happening.
This can be very detrimental as cybercrime-related claims can give rise to exorbitant damages — particularly when they relate to the sensitive information of employees or consumers.
8. Protect Your IP Rights
Protecting your copyrighted and trademarked work can be a very expensive process.
Ultimately, this means that small businesses can often find it difficult or almost impossible to pursue infringement claims or even defend themselves against erroneous infringement claims that may be brought against them.
Purchasing specialized IP insurance (e.g., abatement enforcement coverage, infringement defense, etc.) or receiving protection through a more general type of business insurance (e.g., general liability insurance, etc.) can be an affordable and easy way to remedy this issue.
Types of Insurance for Your Startup
There are several types of business insurance that you should consider purchasing as a startup:
General Liability Insurance
This is a “general” protection against any liability that may arise as a result of conducting ordinary, day-to-day business activities.
Professional Liability Insurance
As the name suggests, professional liability insurance is a type of insurance that has been developed for “professionals” (e.g., doctors, architects, lawyers, etc.). It provides protection against liability that may arise as a result of malpractice, negligence, omissions, and reckless errors.
Data Breach Insurance
You can purchase data breach insurance to protect yourself and your business from the complications of data theft or data breach — particularly when you have access to sensitive customer or employee information.
Cyber Liability Insurance
This is similar to data breach insurance, but it offers legal protections in conjunction with covering monetary damages. This may include:
- Setting up a call center for your customers, employees, or any other affected individuals
- Active protection from cyber attacks
- Providing credit-monitoring services
Commercial Crime Insurance
If you have employees, you will likely want to consider getting commercial crime insurance to protect yourself against libelous acts of fraud, extortion, or dishonesty.
Fiduciary Liability Insurance
Consider getting fiduciary liability insurance if you — or your employees — have fiduciary responsibilities. Fiduciaries have tight responsibilities that they must adhere to in order to avoid legal claims (i.e., giving negligent advice, handling benefits improperly, making errors in administering plans, etc.).
Tech E&O Insurance
You can purchase tech E&O insurance to protect yourself against any liability that may arise as a result of:
- Errors or omissions relating to your business’s technology product(s) or service(s)
- Data breaches
- Technical errors that give rise to software platform downtime(s).
Directors and Officers Insurance
Directors and officers within a corporation have certain responsibilities that they must adhere to. If this is not done, they can be found liable in both civil and criminal law. Claims may be made against them from:
- Any other third-party
Executive Risks Coverage
A large part of successfully running a business is managing risk effectively. Executive risks coverage acknowledges how “broad” the scope of risk can be in a commercial setting and provides protections to various roles within an organization (e.g., directors and officers, plan administrators, fiduciaries, etc.).
Workers’ Compensation Insurance
This is a requirement in the vast majority of states — besides Texas — for every business that has employees. Keep in mind that in the context of workers’ compensation insurance, employees are defined as anyone on a payroll — including the owners of a formal business structure (e.g., LLC, corporation, nonprofit, etc.).
Frequently Asked Questions
Who is the best insurance provider?
Finding the best insurance provider for your startup comes down to several factors, including ease of use, price, and claims management history.
For more information, see our review of the best business insurance for startups.
What types of insurance should I get for my startup?
This will depend on your business’s:
- Risk profile
- Number of employees
Having said that, there are a few coverage policies that are almost always recommended (i.e., general liability insurance, workers’ compensation insurance, professional liability insurance, etc.).
Is business insurance a legal requirement?
Business insurance is generally not a legal requirement, although this is not always the case.
For example, employers are legally required to obtain workers’ compensation insurance in every state besides Texas if they employ workers. Similarly, purchasing short-term disability insurance is a requirement in the following states:
- New Jersey
- New York
- Rhode Island
Do I need business insurance as an LLC?
Yes. An LLC’s “limited liability” only covers personal liability, meaning that the assets of your business remain vulnerable to legal claims and disasters.
Furthermore, the limited personal liability provided by an LLC structure may be revoked if its owner(s) acts in a way that “pierces the corporate veil.” This can sometimes be unpredictable.
If you are an LLC owner who is considering purchasing insurance, see our LLC insurance guide for more information.
How should I purchase business insurance?
Generally speaking, you should follow these three steps when buying business insurance:
- Assess your business’s risks. What lawsuits, damages, or accidents is your business most prone to? This will likely depend on your business’s size, number of employees, and industry. Consider checking out the National Federation of Independent Businesses (NFIB) for information on how to assess your risk. You may also wish to speak to a specialized insurance agent.
- Consider several insurance providers. The coverage policies, customer support, and prices can vary significantly depending on the provider that you choose to work with. Make sure to look around before making a final decision.
- Stay up-to-date. You will want to update your business insurance coverage on an annual basis. As your business grows and changes, so will its risks. At the end of each year, consider whether you are still adequately covered with the policies you have purchased or whether you may need to make any additions or removals.