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Believe it or not, startup insurance risk is a big deal. Even though our goal at Embroker has always been to make business insurance as easy and stress-free as possible, the truth of the matter is that there’s nothing inherently fun about business insurance.
What makes insurance unpopular is that even though it costs your business a solid amount of money to get insured, the benefits of insurance are rarely immediately palpable. In fact, if your business is doing well, you probably won’t even get to see the insurance working for you.
The truth is that business owners only see their business insurance working for them when something bad happens. When you’re hit by costly employee theft, or a wrongful termination lawsuit and your insurance steps in to cover related costs, then you realize that purchasing business insurance was an excellent idea.
Until then, you probably ask yourself regularly, “Do I really need it?”
The answer is, unequivocally, “yes.”
Let’s talk about why that is.
Why Your Startup Needs Business Insurance
Business insurance helps you deal with potential problems that you cannot account for; unexpected events that could affect your business negatively. If you don’t have insurance, a fire or a theft can be a devastating loss that your business might not even be able to recover from financially.
When you buy business insurance, you are transferring the potential financial burden of such events to a third party, the insurer. This provides business owners with another benefit that might not be as obvious—peace of mind.
Insurance acts as a safety net that allows startup founders to focus on doing what it takes to achieve their company goals without having to worry about potentially devastating events that are completely out of their control and could be financially crippling.
We are living in the golden age of litigation in which businesses are being sued at an enormous rate. Does your business stand a chance of being sued? Do you have customers? Do you have employees? Are there third parties visiting your premises? Do you sign business contracts? If you have answered “yes” to any of these questions, being hit by a lawsuit at some point is almost unavoidable.
Do you have business property such as an office, inventory, or equipment? Would you be able to easily replace this property if it somehow gets destroyed or damaged?
Covering the costs of unexpected litigation and property damage is just a small example of what business insurance can do and why a vast majority of startups should get covered.
That’s why business insurance can be considered to be the ultimate “better safe than sorry” business expense. Because the potential risks that you are opening your business up to by not purchasing insurance can be huge.
The Risks of Forgoing Insurance
If you are operating your startup with no insurance, you’re putting yourself at risk. And while these risks can vary greatly from one another, they all usually have the same thing in common; they usually result in your business losing a significant amount of money.
If you are continually losing money as a result of not protecting yourself from these risks, there’s a good chance that money is going to run out at some point. Especially if you’re a young startup that’s just getting started.
Here’s a list of probable business risks that can and, most likely will, occur to your business at some point in time:
Property damage doesn’t just mean earthquakes and floods, even though these risks are also very real for businesses operating in at-risk areas. Your property can be damaged by wind, rain, and other weather conditions. It could also be damaged by fires, lightning, or electrical malfunctions.
Faulty wiring could take out your whole system of computers and servers. Your business could be vandalized. The number of things that can cause damage to your business property is almost endless.
That’s why it’s a good idea for any business that owns or rents any type of property at all to purchase commercial property insurance. If you have this coverage, the policy will pay to have the damaged property replaced or restored if the event that caused the damage is covered by the policy.
If your business has specific risks and needs additional property coverage, it can be obtained through a variety of endorsements. One example is inland marine coverage, which companies that have “traveling property” that is constantly being transported by land purchase in order to protect that property while in transit.
But what happens if your property has been damaged to the point that you can’t work? Sure, your property coverage might be taking care of the cost of repairs, but how are you going to pay your employees, your rent, and your mortgage while your doors are closed?
That’s what business interruption insurance does. If your business has this coverage, all of these expenses will be paid by your insurer if your startup is forced to temporarily close its doors for an extended period of time.
We’ve talked about crimes like vandalism that could affect your property and cost you money, but what other types of crimes can negatively affect your business? Obviously, there are quite a few.
Crimes in which money, securities, or property are stolen from your business can be committed both by employees and third parties. In fact, a huge percentage of business crimes are related to people who work for you or with you in some way.
What about cybercrimes? Cybercrime that targets small businesses is rising at an alarming rate, with nearly 50% of small businesses claiming that they experienced at least one cyberattack last year—cyberattacks that can cost up to $200,000 to recover from properly.
Obviously, modern businesses like tech startups need to have some type of a cyber risk management plan in place in order to try and prevent these types of attacks, but no plan is foolproof. That’s why a cyber liability policy has become one of the most popular insurance policies in recent years. It provides significant financial support for businesses that must recover from a data breach, social engineering, or hacking attack.
If you’re stressed out right now thinking about all of the potential crimes that your business is exposed to, wait until you hear about all of the lawsuits. Employee lawsuits have always been prominent, but have increased in volume because of the recent visibility of the #MeToo movement.
Employers will commonly get hit with lawsuits alleging sexual harassment, or a large variety of discrimination claims (based on age, religion, pregnancy, gender, and more). Even if the claims are unfounded and you end up winning the lawsuit, these types of court cases tend to be long and very expensive. So even if you don’t lose them, you’ll still end up paying significant legal fees.
The insurance policy that can cover expenses related to these types of lawsuits is an employment practices liability insurance policy. It covers all legal fees and even settlements for all covered lawsuits.
Let’s not forget about professional liability lawsuits. People who perform professional services (doctors, lawyers, accountants, real estate agents, etc.) not only have a code of conduct that they need to live up to, they also offer services and advice that their clients can easily interpret as being detrimental to them.
If a client or customer believes that your professional services caused them any types of losses, you could be sued. And once again, even if you do win the case, your legal fees could still be astronomical. The insurance policy that responds to these types of risks is called professional liability or errors & omissions insurance.
This policy can help cover the legal fees and other expenses related to professional liability, contractual disputes, or professional negligence claims.
Fines and Penalties
There is one insurance policy that is actually mandatory for businesses to have in just about every state—workers compensation insurance. If an employee gets injured at work, the company can file a workers comp claim to provide financial aid for the employee’s recovery.
When a company has a workers compensation policy, this decreases the chances of an employee suing the company for damages, since the employee would receive financial help via the policy. Since workers comp is mandated in every state but Texas, most businesses must have it by law and can face significant fines and penalties for not purchasing this coverage.
There are other legal compliances on the state and federal level that many businesses and professionals have to adhere to in order to avoid monetary penalties as well. Law firms especially deal with many compliance challenges as one of their main professional risks.
This is why lawyers commonly purchase specialized professional liability coverage that can cover losses related to penalties and fines that could arise if the law firm is found to be non-compliant.
The Startup Insurance Risks
We’ve talked about the many risks that startups and other small businesses face on an everyday basis. These risks generally have two things in common. First, all of them could lead to potentially crippling financial losses in worst-case scenarios. Secondly, business insurance can help protect you from all of these risks and the financial losses associated with them.
But what if you don’t have insurance? To illustrate the importance of business insurance, let’s take a look at some of the realistic scenarios that you can find yourself in if you are operating your company without being insured.
Lack of Financial Protection: When the sailing is smooth, business owners don’t think about the many issues that could result in financial losses. But all it takes is one incident, like a fire on your premises or a long legal battle with a dissatisfied client, to lose a significant amount of money. Insurance serves as a backup and financial protection for these types of circumstances. Without insurance, your business is paying all of these losses out of pocket, which can become very expensive very quickly.
Lack of Clients and Partners: If your business manufactures or distributes some type of product, there is a good chance that both clients and partners will want to see proof of insurance before deciding to work with you. Any time you are entering a business interaction without another entity, that entity wants to know that they will not open themselves up to potential losses by working with you. The same goes for entering into contractual agreements or working with contractors or other third parties. If you refuse to purchase insurance, your list of potential clients and partners decreases significantly.
Inability to Rent Property: Many landlords will not rent out their property to businesses that do not have basic coverage such a general liability and commercial property insurance. They want to know that their investment is protected as well. If a third party suffers an injury or property damage while visiting your property, the landlord can be sued as well. A general liability policy provides them with protection in such instances. And while landlords usually purchase property insurance themselves, they sometimes request that you purchase coverage for your business contents and equipment that are located on the property.
A Possibility of Jail Time: As we already discussed, workers compensation coverage is mandated by law. In some industries and states, so is professional liability coverage. If you do not have this coverage and are in violation of state laws because of it, this can be considered a felony. While fines will be administered first, business owners that refuse to comply with these state laws regarding insurance coverage could also face jail time.
Inability to Survive Unfortunate Events: If you are hit by a natural disaster or some type of unpredictable event that completely cripples your business, how will you recover? Do you have enough money saved to repair your property and survive while you’re not earning any money? Most startups don’t; not even close. Insurance can not only cover the cost of repairs, it can also provide your business with the money it needs to keep you afloat in the meantime. Without insurance, the chances of a startup surviving such events are slim to none.
The type of business insurance you need and how much of it you should buy depends on a lot of factors that vary from one startup to the other. To get a better understanding of your startup’s risk profile and put together a great insurance program that works for your business and provides you with proper protection at the right price, feel free to reach out to one of our expert brokers for advice and guidance at any time.
Directors and Officers insurance isn’t just for huge, high-profile public companies. Your startup or privately-held company can get the same protection — as long it has leaders and stakeholders who interact with customers, employees, investors, competitors, and government agencies.