What kind of insurance do you need to run a startup?
You may be asking, “I’m just a small startup, what kind of insurance do I need?”
From a legal standpoint, running a startup can be dangerous. Even if you’re a budding company, there’s a number of things that can go wrong and some of them may be out of your control.
That’s why picking the right insurance is absolutely crucial. You want to have a better chance to protect your company from an eventual legal fallback.
Here are the 4 classic business insurance types you should know, when looking to get your startup off the ground.
1. Directors & Officers Insurance (D&O):
This type of insurance protects the highest ranking employees like founders, executives and board members. The coverage includes lawsuits related to misuses of company funds, misrepresentations of company assets, breach of fiduciary duty, failure to comply with workplace laws, and a lack of corporate governance.
In essence, D&O is a liability insurance policy, that’s payable to directors and officers of a company or the company itself. The policy will reimburse settlements or defense costs that result from covered claims.
Smaller startups are often under the impression that D&O is an overkill and they don’t need it, because the chances of getting hit by that kind of lawsuit are fairly small.
Unfortunately, that’s not the case. This study by Chubb from 2016 shows that 26 percent of private companies experienced a claim within a three-year period and the ones that did not buy D&O insurance reported an average loss of nearly $400,000.
2. Employment Practices Liability Insurance (EPLI)
As much as you want to trust your employees, bad situations can happen and even baseless allegations can cost you a lot of money because someone forgot it’s not 1950’s.
That’s why EPLI was designed -- to protect businesses from lawsuits related to violation of legal rights claimed by employees against employers.
That includes claims alleging discrimination (based on sex, race, religion, age, pregnancy, disability), wrongful termination, sexual harassment, failure to promote, defamation, negligent evaluation, mismanagement of employee benefits and more.
The EPL insurance will cover the costs of defending your company against lawsuits, settlements, and judgments. If the act that was committed isn’t illegal, the legal costs will be covered regardless of whether the case is won or lost.
3. Tech Errors & Omissions, including Cyber (E&O)
Technology errors & omissions insurance was designed to protect you from the professional liability risks that are specific to the technology industry.
That’s why E&O insurance is also known as professional liability insurance or malpractice insurance, especially when it is protecting service professionals such as accountants, architects, lawyers, and consultants.
E&O will help cover the legal costs generated by the lawsuit if a client decides to sue you believing that they lost money or health because of an error or miscalculation caused by using your services.
4. Fiduciary Liability
This type of insurance was designed to protect businesses from claims related to the mismanagement and the legal liability arising out of their role as fiduciaries.
What does that mean?
It means that if you’re offering any kind of employee benefits like: medical, dental, vision, health insurance, retirement plans or a stock option plan, you can be sued for a mismanagement of those resources.
Fiduciary liability insurance covers things like: wrongful denial or improper change in benefits, improper advice or counsel, failure to administer the plan according to documents, imprudent investment of assets or lack of investment diversity etc.
Bottom line is this: if you don’t cross all your t’s and dot all the i’s when offering employee benefits, you can be a subject to a costly lawsuit that will likely cripple your business financially, as those claims are almost always very costly and the chances of losing or having to settle are also pretty high.
So to sum it all up - the last thing you want, as you’re trying to get your startup off the ground is a lawsuit.
That’s why you shouldn’t waste any time and take the necessary precautions before something goes wrong.
So how do you get insured?
Capbase partnered up with business insurance platform Embroker, to facilitate the process of insuring your startup.
All Capbase customers are eligible to redeem a 10% discount across all coverages available on the Embroker Startup program, which includes the four aforementioned insurance types (D&O, Cyber/E&O, EPLI, and Fiduciary).
Is your company doing business in Florida? Get an easy-to-follow explanation about what forms you’ll need, information about registration fees, filing deadlines, naming requirements, and more.
Written by Greg Miaskiewicz
Security expert, product designer & serial entrepreneur. Sold previous startup to Integral Ad Science in 2016, where he led a fraud R&D team leading up to a $850M+ purchase by Vista in 2018.