In a resource-strapped, lean, and agile environment like a startup, it can be easy to lose sight of the fact that you are just as vulnerable to business risks as other types of companies. Anything from an employee slip and fall to a security breach can turn into a major liability. For a startup, it’s not common to have reserves in place to cover those financial costs, not to mention the time reaching a resolution will take.
We spoke with Adam Kamm, President of Kamm Insurance Group, to determine what entrepreneurs actually need to do to protect themselves and their startups when it comes to insurance.
“You need to buy coverage before the house is on fire, not when it’s on fire.”
The problem, as Adam pointed out, is for early-stage companies, buying insurance is fairly reactionary. It may not always be in the thick of an emergency, but as a means of attracting employees or venture capital or in response to a customer’s requests. It’s only after they start building the business and maturing over time that they truly see their companies as assets and want to take steps to insure them holistically. However, there are a few types of insurance entrepreneurs should have sooner rather than later.
Directors and Officers Liability Insurance
“If you want to attract a board of directors, then you really need to have protection, because the board is personally liable for the decisions they make as a board.” Directors and Officers Liability Insurance (D&O) serves as that protection, and acts as an asset.
First, to attract high-caliber board members who are being courted by other startups as well, D&O is part of building a competitive advantage that attracts them to your board. For many experienced board members, it’s a requirement to step into a director role, so having the insurance beforehand accelerates your timeline and shows a certain level of sophistication in mitigating business risks.
Second, as an entrepreneur, it “also protects you with representations you make to investors. If I am the entrepreneur, I want to make sure I have D&O because if something goes sideways with the transaction or a big client, there’s protection.”
Specifically, if investors committed capital to a given deal because of a specific contract the company landed or based on a client relationship, and then either falls through, they may have the right to file a claim. D&O covers you in that circumstance, acting as a personal resource in a difficult situation.
Employment Practices Liability Insurance
As a company establishes its operations, Employment Practices Liability Insurance (EPLI) becomes extremely important. This insurance protects a company against employment process-related claims, such as failure to hire, discrimination, sexual harassment, and wrongful termination.
These claims can be extremely draining on a business, both in terms of financial cost and resource cost. The time necessary to address the claim is usually time early-stage entrepreneurs simply do not have. EPLI mitigates the risk, should one of these claims emerge.
Technology Errors and Omissions Insurance and Cyber Liability Insurance
When you actually launch your product, you will need coverage for the service or product you are providing, which usually comes in the form of Technology Errors and Omissions Insurance (Tech E&O) for tech-driven companies. Tech E&O covers claims related to your product or service that argue it has caused some kind of financial loss.
Tech E&O is usually purchased in tandem with Cyber Liability Insurance, which protects you in a situation where sensitive data has been breached. Cyber Liability Insurance isn’t limited to companies that trade in data, but is for any company that stores information through the cloud or other digital storage offerings.
You don’t have to “load up” on insurance as an early-stage company, but you do need to have a good understanding of how it works and when you might need it. When you’re thinking about insurance beyond the types of coverage that exist, there are a few core ideas to keep in mind.
For one, “once you buy coverage, on the whole, that’s when the clock starts for coverage. You want to make sure that what happens today is something protected for down the road. That’s something really important for entrepreneurs to understand — it’s not just today, but the big picture.” Claims aren’t filed the day something happens, and having insurance in place can protect you before you even know you need to be protected.
Additionally, startups pivot. This can pose problems for your insurance coverage if you’re not diligent in reviewing your policies. In other words, “as your model changes, your coverage needs may change.” This is a situation where working closely with a broker can save a lot of time and headaches because brokers who are used to working with companies like yours in the early-stages will have a sense of what to do and how to make adjustments.
Finally, “insurance comes in many forms, but the biggest thing that entrepreneurs need to know is that even entry-level dialogue goes a long way to make sure you’re adequately protected.” Even if you’re not ready to buy insurance, just talking about it and learning what exists, how to get it, and how long it takes will make the process much smoother in the future.