Startup insurance: company risks & how to protect yourself

The startup scene is highly competitive, and new startups are popping up on a daily basis.  According to the National Venture Capital Association, last year U.S venture funds raised over $46 billion, and experts predict that 2020’s funds could reach historic new highs.

But while starting a new company and accessing funds may be easier, it still brings risks. I****t’s essential to protect your business with having the right insurance.

With the right commercial coverage, a startup can operate with peace of mind and focus on growing the company. So here’s a look at the top risks facing high-growth startups, and how you can protect yourself with the right insurance.

[This article sets out different forms of insurance, but should not be used as legal advice. The right insurance for your business will depend on your own circumstances. Seek specialist advice to learn more.]

Risk #1: Product liability

As startups launch new products, they also need to deal with defects, contamination, and recalls. And with these come the potential for claims from unhappy customers.

Even with strong safety and operational practices in place, every year thousands of products are recalled, both voluntarily and involuntarily.

If one of your company’s products causes bodily harm or property damage, you could find yourself facing major lawsuits and negative media attention. Without Product Liability insurance, the company will be left to cover these expensive damages.

Product Liability insurance is a first-party specialty policy that can be added to a General Liability policy, or purchased as a stand-alone policy. The policy can help cover instances of:

• Accidental contamination

• Mistakes or inaccuracies in product labels

• Accidental product defects

• Malicious tampering

• Inaccurate marketing claims

• Government-issued recalls

In addition, it’s important to keep in mind the instances that Product Liability insurance will not cover, such as:

• Customer dissatisfaction. If a customer requests a refund for a product that they aren’t happy with, it will not be covered under the policy.

• An intentional violation of industry or government regulations

Risk #2: Errors and omissions

If a startup offers professional services, such as accounting, legal, or consulting services, they are at risk of being held liable if their services result in a financial loss for a client. Unless your company can afford to pay for potential lawsuits out-of-pocket, it’s important to carry Errors and Omissions (E&O) insurance.

E&O insurance, sometimes referred to as Professional Liability insurance, covers legal defense costs and settlement fees associated with these claims.

This policy has three main coverage areas:

• Professional negligence

• Retroactive claims arising from previous work

• Subcontractor errors

A specific type of E&O insurance, called Tech E&O insurance, is recommended for startups that specialize in IT services. A Tech E&O policy typically also covers cyber liability claims. Your company can also choose to add media liability coverage to an E&O policy as an endorsement for additional coverage.

Keep in mind that E&O policies will not cover the following instances:

• Property damage or third-party bodily injury. That would be covered under General Liability of Commercial Property.

• Wilful acts of misrepresentation of mismanagement

Risk #3: Employment practices liability

As a startup grows, more people will be added to the team. While exciting, this also increases the chance of employment-related lawsuits connected to harassment, discrimination, wrongful termination, and retaliation.

There are federal laws in place which prohibit employment discrimination, but the U.S Equal Employment Opportunity Commission notes that lawsuits alleging retaliation continue to rise.

It’s important for a startup to protect itself with Employment Practices Liability insurance (EPLI). This policy covers the company, management, and employees against the claims mentioned above.

EPLI does not cover instances of bodily injury. That liability is covered under Workers Compensation policies, or, allegations of unpaid wages. But unpaid wages is a common sub-coverage of EPLI called Wage and Hour coverage and can be added to an EPLI policy.

Risk #4: Fiduciary liabilities

Many startups don’t realize that insurance is often a prerequisite to closing a funding round. Venture capital firms often require insurance as a way to protect their investment. The policy that is most often required is Directors and Officers (D&O) insurance.

This policy has three main coverage areas:

• Side A: Covers individual insureds not indemnified by the company

• Side B: Cover costs of reimbursement to the company for indemnifying individual insureds

• Side C: Covers securities claims against the company

Simply put, this policy covers investors and company executives from claims associated with a breach of fiduciary duty like theft of trade secrets, misrepresentation, and wrongful acts that occur as a result of running the company.

While this policy offers comprehensive coverage, there are some instances which are not covered under this policy, such as:

• Intentional illegal acts

• Fraud

• Illegal remuneration

• Property damage

• Bodily harm

• Fiduciary liability for employee benefits

Risk #5: Cyber liability

Nearly all business is handled - at least in part - online. Which leaves a startup exposed to data breaches and hackers. Whether it's customer credit card information or your employees’ bank account information, it’s all vulnerable to cybercriminals.

Many startups make the mistake of believing only large corporations are susceptible to cyberattacks, but nearly a third of all data breaches involve small businesses. In addition, research has shown that the average data breach will cost a company 150 million dollars.

Can your startup afford to cover these costs? If not, you’ll need Cyber Liability insurance.

Cyber liability insurance is the only type of policy to protect against data breaches, loss of digital records, and cyber extortion. This policy can cover the notification, legal, and recovery costs of data breaches.

The key takeaway for startup insurance

Running a high-growth startup and working in a fast-paced environment is exciting, but comes with financial risks. From product recalls to lawsuits and cyberattacks, there’s a lot that can go wrong.

The right startup insurance will give your team the peace of mind they need to focus on growing the business.

So at the very least, take a look at your options and consider which ones meet your needs. Chances are, you'll find a few "good fits."