Tuesday, July 12, 2011

Lesson #62: Insurance Protection for Startups

With startups, many things can go wrong.  But, the last thing you need is to be caught in a jam without the proper insurance protections when an unexpected situation arises.  Below are a few policies to consider for your startup, some mandatory from the start and some optional based on your specific situation or when budgets can afford them.

Business Property.  Since a good portion of your precious startup capital may be going into physical assets or equipment, it makes sense to protect such with business property insurance.  This protects the company's physical assets from things like fire and theft, so they can easily be replaced in the event of a casualty.  The level of your capital investment in physical assets dictates the level of criticality of this insurance.  It is usually affordable and an easy add for peace of mind.

General Liability/Umbrella.  This covers any claims that arise due to the damage or loss of third party property, and injury or loss of life in your office premises or your customers’ premises, due to the negligence of the company or its employees.  It specifically covers expenses related to property damage, bodily injury, medical expenses, and the cost of defending law suits.  I classify this one as mandatory for any business to protect itself from the unknown.

Business Interruption.  This covers any loss of revenues due to an unexpected castrophe to the business (e.g., natural disasters, fires, crime, terrorism).  The importance of this is how dependent is your revenue stream on any one facility.  If your revenues are driving by an outside sales team, probably not all that important.  If you are e-commerce driven based on your technologies run in one central data center, it is more important.  I put this in the category as nice to have if you can afford it.

Errors & Omissions.  This covers any claims that comes from your customers, based on malpractice, mistakes or negligence by the company or its employees.  As an example, since iExplore's business was driven by travel agents booking trips for our customers, we needed this protection in case any of our staff made a mistake in booking any components of the customers' trips (where the opportunity for human error was quite high given the complexities of the product).  So, if you are a people-driven, professional services business, this coverage is very important.

Workers' Compensation.  This covers cases where the employees of a company get injured or lose their life in the company premises or while working for the company in any other location. In these cases the company is responsible for the damage caused and should pay for the medical expenses, rehabilitation expenses or lost wages.  Much like your general liability policy, workers' compensation is a pretty critical coverage needed, and is often required for businesses in many states.

Directors & Officers.  If you are taking in outside capital, your investors will most likely require you to add D&O insurance to protect them as investors and members of the company's board of directors, in case they are ever sued by the company's shareholders for any loss of shareholder value or not acting in the best interests of the shareholders.  This coverage is less important in tightly-held companies where the founders have largely funded the business themselves and own most of the company's equity themselves.

Key Man Insurance.  If your business is dependent on the skills of certain key individuals, key man insurance is a nice-to-have policy to provide additional protections for the company and its investors.  So, in case you get hit by a bus, and the business suffers a short term impact, the key man insurance provides some additional liquidity to recruit your replacement, offset any loss in revenues in the interim and provide monies to distribute to shareholders, if they require such with such key man.

In addition, there may be other policies which are specifically needed for your industry.  So, get good advice from your lawyer or your insurance broker, and make sure you put the proper insurance protections and coverage levels in place from the start.

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1 comment:

michael Flanagan said...

RedRocket, This is a good description of business insurance but the key to buying the right insurance at the right time.

Don't buy to much protection until you need to due to the following factors:

1. contractual requests
2. growing risk profile
3. understand how the products meet your companies exposures.
4. lets a professional with experience in working with companies in your sector & size diagnosis your needs and profile
5. Work with insurance providers who understand the litigation that insurance protects you against.

The spectrum of risk transfer is a key matrix that allows stakeholders to understand benchmarking & analytics that will lead you to the right decisions.

risk management is no accident