Resource Guide: Insurance for Startups

How can you protect yourself and your company as a startup founder?

Even if you’re just in the idea stage, it’s good to be aware of what insurance you’ll need to cover your startup’s activities, says Jonathan Denmark, President and COO of MountainOne’s Insurance Division, which serves clients across Massachusetts. “Essentially, once you have a product, service, or revenue, you need insurance for claims that could arise,” he said.

Best practices when seeking insurance coverage as a startup founder

The bottom line: Insurers need to know they’re backing someone with credentials. “Knowing about the entrepreneur is really important for us and for the underwriter,” Denmark said. “Having a good resume is really important. What have you done? What sort of training do you have specific to the startup you’re doing? Have you apprenticed, earned a degree? Is this your second startup? Underwriters look at that experience more favorably.”

It’s also important for underwriters to see a solid budget or pro forma document. “They want to get a good sense of what is affiliated with this business,” Denmark said.

Denmark also recommends doing your homework. Talk to an attorney, an insurance professional, and an accountant as you’re making these decisions to better understand what risks are associated with your startup and what insurance you’ll need in order to operate legally.
Surround yourself with advisers,” he said. “It’ll increase the likelihood of success.”

Insurance costs for startups

Insurance costs are variable, but Denmark says startup founders should estimate 5-7 percent of their business’ gross revenue for insurance costs. “The budget proportion really depends on the industry, but that’s a good ballpark.”

Startups in the very early stages will likely pay less in insurance costs simply because they won’t need to purchase coverage for things like automotive liability or employment practices controls yet. A fintech company with many employees “would be looking at a $25-$30,000 insurance portfolio” because of the need for cybersecurity coverage, legally required coverages like workers’ compensation, and property coverage for its office headquarters, Denmark said.

Insurance companies calculate costs differently depending on the business they’re working with, but is most often based on square footage and total sales. “So, if you have an 80,000-square-foot warehouse, you’d carry liability on the total space you occupy, plus your total sales. Someone that doesn’t need building coverage will only be rated off of sales,” Denmark said.

Figuring out what coverage you need

It can be tough to figure out what coverage you need, and all companies are different. For instance, a wellness-focused startup that sees customers in a physical location would want general liability insurance, which would cover the business in the event a customer was injured on premises. All companies with employees need to pay for workers’ compensation if they have employees, and a company that hires drivers–either with company cars or their own personal vehicles–would need automobile liability coverage. Any kind of tech company needs cybersecurity insurance. “Anyone they’re doing business with or wants to purchase their services will require that,” Denmark said.
Cost Factors Concept stage cleantech startup, solo founder, home office, no employees Prototype stage SaaS company. Testing traction with freemium model. Home offices plus contract software development Wellness startup, subscription-based web services plus pay-as-you-go coaching. 3 staff operating from small office with classroom Scaling fintech company providing data services to regional banks. 20 staff working at central office and remotely. Three VC's serve on Board of Directors Home food delivery startup, online ordering, with 40 employees, most of whom are drivers using personal vehicles Tiny home startup shipping 300 units per year, 40 employees, manufactured in a 80,000 sf leased warehouse. Company delivers units to sites throughout New England
General Liability
Gross revenue and square footage

 

Professional Liability
Sector and sales

Worker's Compensation
Payroll and employee risk classification

Automobile Liability
Type/size of vehicle

consider for hired and non-company owned vehicles

Umbrella Liability
follows General Liability pricing

Employment Practices Liability
Number of employees and employment practice controls

optional

optional / encouraged

Director and Officer's Coverage
Sector and revenue

only if Board

only if Board

only if Board

Property Coverage
Building and content values

cover equipment

optional

optional

Cybersecurity
Sector, revenue and security controls

encouraged

Insurance Coverages: Index

General Liability

Covers Bodily Injury, Property Damage and Completed Operations, among others

Example – Someone is injured by a product, someone is injured on premises, etc.

Look for: $1,000,000 each occurrence, $2,000,000 aggregate

Worker’s Compensation

Statutory for most companies
Sole & exclusive remedy for workplace injury

Look for: Employer’s liability limits of at least $500,000

Umbrella Liability

Extra layer of liability insurance that covers on top of policies mentioned above

Look for: $1,000,000 minimum, but larger limits as sales (revenue) increase

Property Coverage

Companies should protect all buildings, contents and inventory for which they have insurable interest

Director’s & Officer’s Coverage

For maturing companies, and especially those with an active Board

Look for: Limits of $1,000,000 minimum

Professional Liability

For companies giving advice or acting in a professional capacity Doctors, Lawyers, Insurance, Architect, Consultant – held to a higher standard

Look for: $1,000,000 each occurrence, but larger for growing companies out of start-up mode

Automobile Liability

Anyone operating autos in course of business or employees using their own autos in course of business

Look for: Bodily Injury and Property Damage coverage of $1,000,000

Employment Practices Liability

First party (inside the company) and third party (outside the company) coverage for harassment, wrongful hiring/firing practices

Look for: limits of $1,000,000 and larger, the more employees on staff

Cyber Security

First party, including ransomware and notification, and third party, including theft of client data Coverage is so important for anyone where a system attack could cripple the business or who store credit cards and / or third party info

Look for: Smaller companies should carry $500,000 coverage and larger companies should purchase higher limits

Insurance by growth stage

Stage 1: IDEA
Person, Idea, Words

Insurance Coverage is not critical at the beginning of this stage, but you should speak with an insurance professional about the idea to gain a sense of what coverage will be necessary and what the costs may be for budgetary purposes.

Stage 2: PROTOTYPING
Building, Employees, Capital

Companies will need further advice to determine exposure to business. If there are employees, Workers Compensation will be required. If there is a product, or the entrepreneur is conducting business development, General Liability will be required. Other coverages, including Professional Liability, Automobile Liability and Property Coverage, begin to become more important to protect your business.

Stage 3: VALIDATION
Product Ready, Revenue Realization

All coverages to protect the Company’s assets and exposures should be in place. Workers Compensation, General Liability, Umbrella Liability, Professional Liability (if applicable), Automobile Liability (if applicable) should all be in place. The entrepreneur should consider business risks and possibly add Employment Practices Liability and Cyber Security.

SCALING: Profits

At this point, the business is growing and all insurance coverage should be well understood, and contemplated for the business

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