Editor’s Note: After we wrote about how we spend our money, people started asking how startup insurance works. Baremetrics is a happy customer of Founder Shield, who helped us get our insurance setup, so I asked Carl to help me put together a post to demystify some of the murky water that is business insurance. I hope this is helpful to you & your company! — Josh Pigford
The world of insurance is, seemingly, a black hole of conflicting information and sleazy salespeople who are trying to dupe you into buying something you don’t need. And between generating some good user traction, flushing out the revenue model, or closing the Series A round, insurance falls way down the list of important to-do’s.
However, proper business insurance coverage can be critical to—and often a requirement for—a startup’s success.
Here’s a breakdown of the seven main types of business insurance startups need, when you need them, how much to get, how much it will cost you and how to get them. This isn’t an exhaustive list of every kind of insurance available, but it covers the scenarios that most startups will face at some point in the life of their business.
General liability insurance is what most founders think of as “slip and fall” insurance, but it actually goes way beyond the simple office mishap.
General liability insurance covers all kinds of bodily injury and property damage caused by your company and includes the actions of your team members outside of the office as well as the use of your products by your customers.
$1M per occurrence and $2M aggregate is the standard starting point for any startup. Some landlords and partners may want this limit bumped up to $2/4M respectively or will request that an “umbrella policy” go on top of the underlying $1/2M, but that varies by lease.
Approximate pricing: $500-2,000 per year
Worker’s Comp covers injuries to your own employees while on the job. Similarly, disability provides a source of income to injured employees when they aren’t able to perform their job.
There are statutory minimums that vary by state, and as long as you hit those minimums, you’re all set. A good starting point is usually $1M in coverage, however, because that is the limit we see most often required by contracts and the pricing difference is typically negligible.
Approximate pricing: $300-500 per salaried employee per year
Errors and Omissions Insurance (E&O) covers claims against you and your company for problems with your product/service that cause a financial loss. The problem can be professional (doctor’s malpractice) or technical (newly deployed code causing errors).
This is one of the most important insurance policies for tech startups, particularly in the B2B SaaS space. The average contract tends to be large, and a bad deploy can affect tons of users at the same time, causing the damage claims to pile up.
$1M is a good starting point for E&O if you’re just launching your product. It will also be the minimum you’ll see on a contract requirement. When revenues exceed $3-5M, additional coverage should be considered.
Approximate pricing: $1,500-4,000 per year
Cyber liability insurance lessons the costs from data breach incidents and the loss or theft of third party data. Losses covered can include lawsuits, forensic costs, data restoration costs, breach notification costs (this is a big one), regulatory costs, and more.
Cyber policies often include “business interruption insurance” as well. This a significant piece of coverage because it covers the company’s expenses (and the lost profits, in some situations) if your company needs to temporarily prohibit access to the product after a data breach.
E&O and Cyber will usually be paired together, so the same limits will apply until some serious growth in revenues and user base occurs.
Approximate pricing: $1,500-4,000 per year (included with the cost of E&O)
Key Person Insurance (or “Key Man Insurance”) is a life insurance policy that pays out to the company rather than family upon insured person’s death or incapacitation.
Unlike other policies, a key person insurance policy will pay out in a lump sum once after a situation triggers coverage. This is to compensate for the hefty expenses startups incur when searching for a replacement and continuing to operate in the interim.
$1M is a baseline policy, but you can go lower or higher based on the amount raised and skill set of the key person. Similar to D&O, companies that have raised $8-10M+ usually get $2M in coverage per key person.
Approximate pricing: Varies widely by product, carrier, and health/age of the key person
Employment Practices Liability Insurance (EPLI) covers claims when it comes to Human Resources within a company: hiring, firing, disciplinary action, and more.
The average EPL claim comes in at about $400-500K and one of the most heavily hit demographics is made up of companies with <100 employees. It’s recommend to start at $1M, but if you can swing $2M, you’ll likely be better off.
Approximate pricing: $3,000-8,000 per year
Directors and Officers Insurance (D&O) insurance covers lawsuits against, wait for it, Directors or Officers of the company related to the actions taken on behalf of the company in their capacity as, you guessed it, Directors and Officers.
$1M is a standard starting point for D&O coverage. Once you raise a round of $8M+, it’s time to think about moving up to $2M+ limits.
Approximate pricing: $5,000-10,000 per year
There are essentially five major events that should prompt you to look in to business insurance.
Really, any business insurance broker can get you set up with the insurance you need, but having someone with specific experience with startups can go a long way to getting the right type of insurance as well as avoiding over-insuring your business.
If you don’t have insurance for your startup, I highly recommend reaching out to Founder Shield. Feel free to reference their coverage page for more details.