How much is health insurance for startups?

  

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One of the biggest challenges for startups is finding a solution for employee health insurance - without bankrupting the company.  In order to grow your company you are going to have to be able to attract and retain the best talent.  Sure, a nice salary will go a long way, but everyone is going to want to know that they will have a good medical insurance plan in place if they work for you.  This is especially true if they have a family (including children - who spend a lot of time in doctor's offices), or they are coming from a company (or are being recruited by other companies) where they had extensive benefits.

Why you might as well start smoking

The first thing you need to understand is that, as a startup, you will have fewer than 50 employees.  This means that you will be subject to NY State's community rating guidelines.....these dictate that any company with fewer than 50 employees can purchase medical insurance and the rates cannot deviate from one employer to another.  So your firm of 3 healthy people in their mid-20's that never go to the doctor and never have medical claims will get the same rate as the three 60 year old chain smoking, former coal miners running an asbestos removal company next door.  So for obvious reasons the insurance companies are not inclined to provide their best rates to employers with less than 50 employees.

(once you reach 50 employees your company stands on its own performance - insurers will negotiate their rates, and as a "healthy company" you will have lower rates....lower than the community rates)

One solution is a PEO, where you can get broad employee benefits packages as part of their large group of employees.  The downside is that you have to buy everything else the PEO is selling plus pay their administrative fees.  The alternative:  Do it yourself.

The million dollar question - answered

That brings us back to the original question:  How much does health insurance cost for a startup?  The rates vary by insurer and change quarterly.  Therer are also variables that will affect your bottom line expense (employee contribution, increasing deductibles and copays, etc).  If you are interested in the current rates for a NYC company follow the link above.

Startup E&O insurance - Checking the box

  

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Very often, the first time a company will look into errors and omissions (E&O) insurance will be when it shows up as a requirement in a client contract.  The company is still young at this point, and eager to get revenue on the books - the last thing they need is to have a new expense hit the bottom line.  However, if they want to close the deal and land the new client, they need to provide evidence that they have this coverage.  The box must be checked!  Startup E&O insurance, therefore, is purchased out of necessity and the single most important consideration is the cost.  A $1million dollar E&O policy, $25,000 deductible, $1,500 premium - check.

If you're insured with Kirkwood, you may not be covered

So let's assume you get what you pay for....the cheapest possible policy will also be the most restrictive and provide the least coverage (not always the case but more on that in a future post).  Knowing that, you have to recognize that the policy cannot be expected to provide a wide security blanket if something does go wrong.  Privacy claims, intellectual property claims, claims made outside the US and a variety of other shortcomings are typical to "check the box" policies.  As long as you're OK with that, the startup E&O policy serves a good purpose - it's just not true insurance.

The Ticking Time Bomb

Each year the company grows, adding clients, growing revenues and expanding operations.  During this time the startup E&O insurance is renewed, the nominal cost may have risen, but it corresponds with the growth of your company, no biggie - many boxes have been checked at this point.  Maybe you have even increased the limit to $5 million or $10 million to satisfy larger contracts.  E&O?  Check!  But then the claim comes in - and coverage is declined.  Kirkwood cites various exclusions in their policy.  Now you are looking at possibly millions of dollars in defense and settlements.  The future of your company hangs in the balance.  You are scratching your head - you paid for insurance right?  Isn't it supposed to work??

There is nothing wrong with buying an inexpensive E&O policy to get those early contracts as long as you understand the you may have inferior coverage and you are self-insuring to a great extent.  But, as your company matures, you must go back to that policy and see if it still makes sense.  You can probably afford to transfer more risk to an insurer, strengthen your corporate shield and protect the longevity of your organization.

Venture Capital Insurance Cheaper for Some than Others

  

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In a previous post I discussed how we have found that many Venture Capital firms pay more for insurance than they should - often for policies that don't even properly address the risks of their company.  The National Venture Capital Association just circulated an illustration with 9 specific examples of their member firms who, through the VentureInsure program, have saved as much as 57% on their insurance costs (where's that Geico lizard now??), while getting better coverage.

Check this out - this represents only the basic office coverage such as General Liability, Property, Umbrella.  Venture Capital insurance policies such as D&O and Professional Liability are not included in this illustration - however it is worth noting that historically the savings on that line of coverage, when moved to VentureInsure, has averaged more than 20%....

Errors & Omissions Insurance - WTF?? (What's That For?)

  

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EPIC FAIL

By definition, Errors and Omissions (E&O) insurance covers professionals for actual or alleged errors, omissions or mistakes – caused by them or their products & services – which results in another party’s financial harm.  Technology and digital media companies secure E&O insurance to safeguard against claims that the services they provide to others did not function properly.  Once triggered by a suit or other demand for damages, an E&O policy will pay to defend the policy holder (pay legal defense fees) and any settlements or judgements that are made against them.  This is the case regardless of whether the claim has merit or not.  Put simply, an E&O policy responds to claims for a “failure to perform“.

You’ve been served

Commonly, claims come from clients who purchased a service/system and then allege that the system didn’t work, resulting in their financial loss.  Let’s use the example of a client that purchases a mission critical software system to manage all of their business’s financial functions…..payroll, payables, receivable, taxes, etc…..the software promises to streamline all of these items where the client was previously using multiple platforms and vendors.  Just a week after the client “flipped the switch” and started using the new system there was a crash.  All of their data is lost and it takes them two full weeks to correct the problem.  During this time they lose thousands of dollars recreating data, paying overtime, contacting clients, incurring penalties for non-payment of bills – and the list goes on.  They sue the IT provider for all of the financial damages including their legal expenses, lost opportunity costs & loss of future revenue – and they want their money back for the faulty system which they ended up scrapping.

Insurance to the rescue

In this case if the IT provider were to submit the claim to their General Liability (GL) provider, the claim would be denied.  General Liability covers claims for bodily injury & property damage – neither of which occurred in this situation.  They would also submit the claim to their E&O insurer.   While there is no industry standard, off-the-shelf E&O policy (every insurer has their own contract with it’s own terms, conditions, coverages, exclusions, etc) a typical E&O policy will pay the defense expenses incurred by the IT provider, along with the consequential damages claimed by the clients…..but, most likely, not the return of fees paid for the faulty system.   More on this in a future post….

In the end, E&O is a risk transfer tool that companies can use to hedge against claims for mistakes made by their people or the products/services they provide.

Tech Errors & Omissions Insurance Series

  

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Errors & Omissions insurance is one of the most misunderstood coverages that Technology & Digital Media companies will encounter – and with good reason.  It is a coverage that goes by many different names (E&O, professional liability, cyber liability…), has no industry standard policy form (like a general liability policy, where every carrier is providing essentially the same coverage) and it changes on what seems like a daily basis.  To help simplify and demystify Errors and Omissions coverage, we will provide a multi-part series of posts that cover the basics about Errors & Omissions insurance.   These are the topics that we will addess in the coming weeks:

1. E&O – WTF? (What’s that for??)
2. E&O Insurance – Checking the box
3. The E&O Trifecta – Covering Intellectual Property, Privacy and Media
4. How to GET PAID by your E&O policy
5. How Much does E&O insurance cost ?(& secrets to getting the cost down)
6. What is involved in getting E&O Insurance?
7. How E&O Claims are triggered and what happens when they are?
8. The 5 Most Important Considerations for E&O Buyers

Venture Capital Insurance and the A Team

  

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I didn’t see the A-Team movie this Summer, but have to admit as a child of the 80’s I was a big fan of the TV show.  I remember vividly watching the pilot as a 13 year old after the Redskins beat the Dolphins in Super Bowl XVII.  I know BA hates flying, I know the crack commando team went to prison in 1972 for a crime they didn’t commit, and I know that Hannibal (George Peppard, the only Hannibal) is a cigar smoking, master of disguise.  

The real A Team

So what does this all have to do with insurance?  Probably not alot…but here’s a shot:

We work with many VC’s as part of our role in managing the insurance program for members of the NVCA.  And we have found that, like most innovators, Venture Capitalists are so focused on working IN their business that they sometimes don’t spend enough time working  ON their business.  This is evidenced with our frequent discovery of poorly structured insurance placements for VC’s, on even the simplest of insurance policies.  (Clarification – it’s not a policy holder’s fault if their insurance is not up to par….that is their broker’s job.  The policyholder is only responsible for choosing the right broker)  Take a General Liability (GL) policy for example:  every company has one of these babies.  It covers your business for claims that you, your employees or products/services caused someone else bodily injury or property damage.  But it also covers a wide variety of personal injury issues that could come into play for a VC.  Since most insurers (I’m not aware of any) don’t have a specific classification in their policies for a VC firm, they will categorize them as investment advisors or some other similar financial organization.  And in doing so they will also receive a myriad of exclusions that are typical for financial organizations….inluding ones that will severly limit their ability to cover personal injury claims.  Insurers also worry about picking up vicarious risks stemming from activities of portfolio companies….hence, more exclusions.

Another problem in this scenario is the pricing.  Since most insurers shy away from insuring smaller financial organizations (due to perceived high risk trading/transactional risk that could spill over onto a GL policy) they don’t even offer a small business policy.  So most VC’s are placed on a policy that is designed, and priced, for larger firms. 

Recognizing these issues and shortcomings our crack team at TechAssure set out with NVCA to build a solution for Venture Capital companies.  The result, which is exclusively available to it’s members, corrects the coverage problems, removing almost every exclusion, and has reduced the average venture capital firm’s costs by more than 20%.  The policy recognizes VC’s as a “small business” as it pertains to risks covered by basic insurance – the way it should be.

Ready for the tie-in??  As Hannibal Smith said best- I love it when a plan comes together.

Badges? We don't need no stinking badges...?

  

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…but we got em anyway.

1st 25 Likes on Facebook get one!!

Startup Tech Co's - PEO or DIY?

  

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When faced with the task of setting up Payroll, Employee Benefits, Human Resources and Workers Compensation Insurance many startup Tech/Digital Media companies turn to Professional Employer Organizations(PEOs).  The concept is that, using a PEO, the company can outsource all of these items to another company and take advantage of economies of scale by participating in their larger group buying power.  And by using a PEO they can pass off unwanted administrative tasks and focus on their own business.  When working with a PEO the company pays the cost of the services plus a monthly, per employee, fee for the administration of the program.  The startup must take the entire bundled package from the PEO, which often includes HR services that they, as a small company, may never use (recruiting, workplace safety, training, etc.). 

But what would the cost be to do it yourself (DIY)?  Do the benefits of outsourcing really make financial sense?  And does it scale for a company that expects high growth, or will it create an unnecessary financial drain on much needed cash?

InnovationGuard has a Startup Package  that is available on an a la carte basis – meaning they choose only the services they need – including a full suite of Payroll and HR services.  We recently did a conceptual comparison for a startup who was considering a PEO for their company.  For illustrative purpose we used the same actual costs for the basic products/services such as workers compensation (for example, the cost is set by the State, so there should be no difference).  Then we added the PEO’s monthly per employee administrative charge.  (A PEO does not typically break out these costs in their bill – they simply charge a single all inclusive fee.)

Total Annual Cost PEO – $10,980 (plus each additional new employee will be another $1,800/year more than a DIY program)

Total Annual Cost InnovationGuard – $3,780

*includes direct deposit, UPS delivery, and option for paperless paychecks

Based on the Following:
3 Male Employees, Programmers – $240,000 annual salary
1 Female Employee, Exec Officer – $60,000 annual salary

Are there administrative costs associated with a DIY that do not appear here?  Perhaps.  But for tasks like filling out applications, gathering and submitting employee and payroll info – both will require some time on the company’s part.  Once all of these things are set up there is very little ongoing administration necessary.  A key missing piece to all this is Employee Medical insurance, an area where the PEO as an “employer” of potentially thousands of employees can get better rates from insurers.  While groups of over 50 employees can benefit with lower health rates, that is dependent upon the group’s overall claims history.  In the case of this company, for whom we did the conceptual, the PEO’s single rate was estimated to be $350/mo.  A small group rate from Oxford for an HMO in NY would be appx $400/mo…..and that is before increasing co-pays, deductibles, employee contributions, etc. to bring cost down.  Another thought – while there may be a financial advantage on the medical insurance, our experience is that most startups hire young healthy employees who rarely even use their medical coverage.

I obviously come at this issue from a biased perspective.  I would be interested to hear thoughts and feedback on other company’s experiences with PEO’s, including the pros and cons.

7 Things You'll Say That Could Blow Up Your Insurance Coverage

  

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Under most Errors and Omissions, Directors and Officers and other liability policies there are certain terms that you must comply with in order for the policy to respond to a claim.  The issue that seems to be causing problems for insureds recently is the timeliness of claim reporting.  All policies require that the insurer is notified in a certain way, in a specified time frame.  And because most people don’t read the “fine print” of their policy, and most brokers do a poor job educating their clients, people tend to sit on potential claims – sometimes until it’s too late.  The insurer can deny your claim simply because it was reported too late.

 Click Below to see the 7 Common Reasons Why Claims are Not Reported on Time (And As a Result are NOT Covered)

1.  “It wouldn’t be covered anyway”

Let the insurance company decide.  Another similar statement we often hear is “I didn’t think it would be covered, and didn’t want the insurer to raise my rates if I reported it”.  There is no cost to reporting a claim that is not covered.  Better safe than sorry.

2.  “I referenced the claim on the application”

Under terms of policy indicating on the application isn’t notice

 3.  “I told my General Liability carrier”

Notice to one insurer is not notice to all insurers

 4.  “I didn’t have a law suit”

Review your policy’s definition of “claim” (not always a suit)

5.   ”We were going to work out the problem”

That means that you knew about the potential claim or should have – and reported it.  You can’t decide after your own negotiations fell apart to then hand off the carnage to the insurer

6.   ”People are always asking for their money back”

This is often first sign of an unhappy customer and a resulting claim. Check your policy’s  definition of “claim”

7.  “I protected the insurance company’s interests, too, by engaging my current lawyer who knows my business best”

Don’t assign your own counsel to a claim.  Insurers don’t like that!  I can’t tell you how many times we get calls from insureds and their lawyers who are months or even years into a claim that we were not aware of –  and only decide to look into insurance when they realize how much it is going to cost

Proper notice is critical for coverage to be applicable.  All too often policy holders take their coverage for granted and in doing so fail to comply with the terms of their contract – jeopardizing or ruling out coverage.  Some simple practices, including open communication with your broker, can help preserve your rights to be afforded coverage under your insurance policy.

• Do not make assumptions
• Talk to your broker
• Remember that a demand for service or money could trigger a notice requirement
• They should know the difference between claims made and claims made and reported
• Look at your policy’s definitions of Claim, Wrongful Act and requirements related to notice of claims or circumstances
• NEVER assign counsel, or try to settle a claim on your own without talking with your carrier

Note:  Assist from Chubb presentation at 2010 TechAssure national conference

Who Sues a VC?

  

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The right insurance program can shield a VC from these, and other, unfortunate scenarios