Startup insurance - a guide for founders

Today’s startups have a huge internal and external pressure to deliver. It's rare to meet a founder or founding team who ‘just works the 9-6’, because of this insurance can be one of the tasks that gets forgotten, or left to the last minute. As a result often only a handful of insurers can provide a quote quickly at the last minute. With this time pressure the first quote is often the one startups go for, but this may not necessarily be the most sustainable and scalable insurance policy for these business.

To make things more difficult for founders who may have limited insurance knowledge, a lot of covers are known by multiple names which can be confusing. A knowledge of the distinctions between covers is important in order to understand the right policy for the risks a business faces.

All of this before we tackle the elephant in the room: most don’t find insurance interesting, and actively avoid dealing with it.

Fortunately, in this guide we've outlined in simple terms what insurance you might consider as a startup founder, and what situations may make it necessary to update your coverage.

What insurance does a startup need?

Every business is different, and the insurance you require will be based on a number of different factors including company size, the type of work you do and where you operate. However there are some specific covers that you should be aware of if you are a startup.

Commercial Combined

Often the first policy considered by startups, commercial combined is as the name suggests a combination of covers. This policy includes Employers Liability (EL) which is a legal requirement in the UK, Public & Products Liability (PL), and cover for any office equipment or portable electronics the company owns. This cover is sometimes known as General Liability.

It's important to make sure the address information is kept updated, equipment levels are accurate (although it isn’t necessary to notify insurers every time you buy a new Mac) and that the PL cover applies where you need it (worldwide or otherwise).

Directors & Officers (D&O)

Sometimes known as management liability, this covers your management team for claims against them relating to how they run the company. This includes claims naming them in a case of misrepresentation, poor supplier choice or mismanagement, for example.

As a startup scales, so should this policy. Adding policies such as Employment Practices Liability for claims arising from actual or alleged wrongful dismissal, harassment or discrimination is good practice as a startup takes on more employees. It's important to make sure the policy is appropriate for the pool of investors you have and territories you have subsidiaries in.

Professional Indemnity (PI) & Cyber

Another combined cover, PI (sometimes called Errors & Omissions) covers you if a client claims your service is inadequate while Cyber cover, sometimes called data privacy liability or similar is two-fold;

• 3rd party cyber is the default cover in a cyber policy and covers you for claims arising from your failure to protect your clients.
• 1st party cyber covers your own losses - including restoration costs, increased cost of working or loss of income as a result of cyber breach.

There has been a rise in cyber crime and ransomware which reduces insurers appetite to take on the risk, as a result 1st party cyber is often excluded as standard, with additional costs required to include this in a policy. Given the risk, this type of cover should not be overlooked, having someone from your tech team look over the policy can be beneficial if this is new to you.

Intellectual Property (IP)

Depending on what you do, IP cover can be necessary as a sub-limit to your PI policy, if the perceived risk is low. Your broker will be able to provide guidance on the risk based on information about your business, for example legal fees (especially in the US) can rack up quickly.

So called 'patent trolls', individuals or entities that use patent infringement claims to win court judgments for profit or to stifle competition, are becoming increasingly common. Therefore, having deployable insurance for defense fees if it is alleged you have infringed on another company’s IP is an important part of your risk management strategy.

When should you review your covers?

Investment Triggers

If you identify as a startup, the prospect of an investment round often acts as a catalyst for a number of reviews within your business, from your GTM to your accounts.

Typically, the term sheet will state you require D&O, and less frequently key-person insurance within a given time frame of signing. Insurers will always ask about your burn-rate, runway and forecast size of round whilst you’re actively seeking investment, so be prepared to give high-level details on this.

Follow-on rounds (debt or equity) are increasingly requiring investors named as financial interests or loss payees on policies. Not every insurer allows this, so working with your broker as an extension of your investment team will ensure you avoid unnecessary stress, additional premium and delays with the raise.

Acquisition or setting up a subsidiary

Whether you are being acquired, or are the acquirer, you’ll need to make sure all policies are still appropriate when these major organisation changes occur.

New client acquisition

Here there are two common triggers would result in the need for a review of your insurance.

• Firstly, if you are considering selling your product or service in a new country or territory (especially the US or Canada).
• Secondly, if you have a B2B model, as you scale, you’ll naturally want to acquire larger clients to increase your AOV and provide increased levels of client feedback into the product. Unfortunately for startups, large companies, especially big corporations often have archaic and blocky insurance requirements (and procurement processes in general). The procurement requirements are often set by someone who has little-to-know understanding of the startup environment and so can often ask for much higher insurance limits for PI, PL & Cyber than you currently have.

It is important for your broker to present options of policies that are scalable with you, so that you can prevent unnecessary roadblocks with your sales team on client acquisition.

A somewhat crude analogy, but an accurate one, is if you want to play with the big dogs, then you best bring enough chips to the table. It may seem like an insurance policy that costs the same as the first client with this request is not worth it, but the ROI will pay itself off quickly as you win clients with these requirements more often.

Sanctioned Territories

At the time of writing this article, a lot of scrutiny is on startups with any activities, employees or subsidiaries in any sanctioned territories. If you feel this is relevant to you then get in touch with your current insurance provider, or schedule a call with our team today.

How we work with startups at SuperscriptQ

Starting and scaling a business is exciting, but it can also be risky too. Insurance enables startups to manage this risk more effectively, which enables growth. The startup space is constantly evolving, and with that, the risk landscape continues to transform.

SuperscriptQ supports technology startups who increasingly require bespoke insurance to protect themselves and enable continued growth, get in touch with the team to find out more.

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