The fast-paced nature of the startup world means that entrepreneurs often overlook the insurance products necessary to protect a growing company. But simply telling your board “We have insurance” does not mean it is the appropriate insurance for your particular company or that the policy is being properly utilized. Insurance should be viewed as, and maximized like, any other company asset.
To start, entrepreneurs should consider the followng five forms of insurance coverages:
1. Comprehensive general liability (CGL) insurance
CGL insurance protects the company’s assets when a claim is brought for alleged:
- Third-party bodily injury
- Property damage
- Personal property
- Advertising injury
What’s most valuable about CGL insurance is that it requires the insurance company to provide or pay for your company’s legal defense when claims are brought. If possible, then, obtain wording that allows you to select your own counsel, either from the list or not, with the company's consent, to avoid potential conflicts of interest .
Keep in mind that CGL policies contain an ever-expanding list of exclusions and conditions designed to prevent coverage. For instance, insurance policies usually require notice of a claim or loss “as soon as practicable,” though what that means varies depending on what your state law requires. In any event, don’t sit around and think about it -- give notice. You can always withdraw if the matter fails to develop.
In addition, since most service contracts require that a company have at least $l million in CGL coverage, even if you think you can get away with not having this level of protection, you will have to purchase it anyway.
2. Directors and officers (D&O) liability insurance
Though having well-known individuals on your board will help grow the company, these individuals will insist they be protected from litigation concerning their business decisions. Essential to any startup, in this regard, is Side "A" D&O coverage, which protects officers and directors from claims alleging “ wrongful acts,” meaning that their decisions negatively impacted the value of the company.
Side "B" coverage protects the company by indemnifying the director or officer and has to pay for the defense or indemnity costs.
Side "C" coverage protects the company directly in the face of shareholder/class action suits over securities issues.
Where limited resources are available, most companies opt for sides A and B only. These policies exclude judgments and verdicts that the individuals involved committed fraud, were dishonest, consiously violated the law and acted out of self-interest.
3. Cyber/media Insurance
Given recent high-profile hacking incidents in the busincess world, the need for cyber insurance is clear. Unfortunately, there is no standard cyber policy form, and various insurers’ policies contain untried provisions, terms and definitions.
Like the coverages already described, these policies provide both defense and indemnity coverage. They also may provide services for compliance, with regulatory notice and disclosure requirements, and crisis management, once an incident has occurred.
Because policies may not be “standard form,” your startup needs to take precautionary measures. As governments propose “best practices” and enact regulations, insurers are resisting claims from companies they believe have not instituted “industry-standard” programs to secure data.
4. First-party property insurance
First-party property insurance provides coverage for physical damage to company property. The best form of this coverage is “all risk” coverage, which provides protection for types of damage to buildings and equipment not specifically excluded.
This insurance is important for startups with significant infrastructure. Even tech companies are well advised to purchase it. First-party property insurance protects against damage to the servers themselves. An owner may add business interruption coverage for losses due to the down time involved in replacing or fixing the equipment. Exclusions in these policies include damage or loss of your property due to machinery breakdown, wear and tear and design defects.
5. Employment liability insurance
With employment liability insurance, a startup ensures that its defense will be provided or paid for by their insurer. This is different from the workers compensation insurance all states require, but it can be purchased in a package with workers comp, or even D&O coverage. Since discrimination claims (i.e., claims over gender, nationality, ethnicity, race, sexual orientation or age) are expensive to litigate and settle, this coverage is key for startups hiring highly skilled and sought-after employees.