The Five Things All Start-Ups Need to Know about Insurance
As a start-up, you are most likely focusing your efforts on building your new product or service, going after customers, finding great people to help you launch your business and maybe even courting investors. It’s likely that the last thing you are thinking about is purchasing insurance. You may think that you are too small or too new, but that isn’t necessarily the case. As a matter of fact, to manage the risks of your budding business, insurance should be something you are thinking about right now. You don’t want to run the risk of having your business wiped out by a claim or two before you’re even off the ground.
Here are five things you need to know about insurance as a start-up.
1) It’s never too soon to start thinking about General Liability insurance
As soon as offer your product or service, you should make sure you are covered by General Liability insurance. General Liability covers you and your employees in case of any bodily injury and property damage to third parties caused by your product/service.
2) Property insurance is important – even if you do not own a building
Property insurance includes not only a building or home. It also includes any physical property you have as well as the space you occupy. If you are renting space, your landlord is likely to insist that you have insurance against any improvements you make to the space. Tech start-ups especially need to insure computers and media storage against damage or loss. Consider additional computer or media coverage if you are in a tech business.
3) Even if you only have one employee, you may need Workers’ Compensation
The state you live in determines the minimum number of employees who are on your payroll before you are required to carry Workers’ Compensation. In most states, it is one (not including the owner). Workers’ Compensation is designed to compensate employees who suffer work related injury or illness. This insurance will pay medical expenses as well as lost wages resulting from the injury or illness of the employee.
4) Auto Liability insurance for a non-company-owned vehicle? You bet.
Contrary to popular belief, even if you are driving a non-company car, you may be liable if you are in a car accident while on business, such as driving to an appointment with your client. This is the case for your employees as well. An accident victim can sue your company in addition to suing you. Commercial auto liability insurance is likely required.
5) Obamacare has dramatically changed the health insurance landscape for start-ups
As of October 1, 2013, new state exchanges, or online marketplaces, allow you to purchase health insurance for yourself or for your business. Although you are not required to purchase healthcare for your employees (assuming you have less than 50 employees), all individuals will be required to have health insurance per the “Individual Mandate” or face fines. Helping your employees obtain health insurance is a great way to attract the best and brightest talent. And, as of 2014, favorable small business tax credits for healthcare kick in.
As you grow, so will your insurance needs. You may need errors and omissions insurance, additional network security protection, potentially IP protection, director’s and officer’s insurance or other protection. The amount, type and combination of insurance you carry will depend on the nature of your business, the size of your assets and employees and your industry. For now, you most likely are looking to keep costs down and focus on growing your start-up. Insurance premiums can be quite affordable, especially if you choose a high deductible. And compared to the alternative of facing a claim, investing in insurance to protect your start-up is a wise business decision.
Rollins Insurance wants to make sure you stay in the game and give your business the best chance of success. Contact your Rollins representative to discuss start-up insurance that is right for you.
Photo Credit: plewicki via Photopin cc
The acquisition of a D&O policy is often triggered by one of the following events:
- new board member requires that company has D&O
- new investor (such as a VC) requires D&O insurance as part of term sheet
Ultimately the D&O policy is the mechanism by which you will be shielding the personal assets of the officers and directors - as well as the balance sheet of the company (most company have an indemnification agreement in their bi-laws that basically translates into this: the company is responsible to cover claims against the D&O's out of its coffers...the problem comes when there is no money available or the indemnification is prohibited by law). Most people who will agree to be on your board will not be willing to risk their personal assets based on the performance of your company. You might not either.
So back to the original question - When? As soon as company is operational with a management team and board AND as soon as you can afford to transfer the risk to an insurer (minimum premium can be about $2,500/year)
One other important point to consider - as a private company your biggest threat of action against the management team will be from employees. D&O policies can cover employment practices claims (wrongful termination, failure to hire, discrimination...) once you have a workforce it will increase your risk and be another factor to consider when thinking about D&O insurance.
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%....
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.
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
The right insurance program can shield a VC from these, and other, unfortunate scenarios
As an entrepreneur/executive of an early stage tech company one of the decisions you need to make is who to use to help you insure your company. For some reason many people go to great lengths to do due diligence when selecting an attorney or accountant, but then spend thirty seconds deciding who should handle their insurance. Those people tend to do business with one (or more) of five “people”. So here are the five people you meet in heaven when you buy insurance – and how these people impact your company:
Why: You’ve just set up your company and you need the basics – General Liability, Workers Comp, Property, etc. The guy on your whiffle ball team, who also helped you with your homeowners insurance, says he can hook you up! He has no experience working with other companies like yours, no relationships with insurers that are familiar with your industry. But he’s a great guy and he assures you it’s a no brainer. He sends you some applications to fill out. The questions seem odd, don’t really apply to your company – and most of all it takes a sh*$! ton of time for you to complete. You fax them back, wait a couple of weeks and he surfaces with a policy and a bill.
The Result: No thought went into anticipating what you may need next (like E&O when you sign your first client contract, D&O when you get your first round of financing, global coverage when you open a sales office in the UK, etc). The insurer you are with – let’s call them Thunderbird Mutual – can’t provide any of those coverages. So when they come up, which will be sooner than you think, there will be a mad scramble to find these policies with different insurers, costing you time and more money. You end up with a disjointed, patchwork insurance program with multiple insurers and no economies of scale by having everything in one package. Since your buddy has no experience in your industry, he has no ability to provide services that may drive down your cost and reduce the likelihood of your having a claim. Now you can get away with the buddy’s insurance program for a while – but if you have a claim, or need advice on a contract or industry specific issue you will find out the hard way that he was not the right broker for you.
The Biggest Broker in the World!
Why: Your company is the next Facebook. You have some high profile VC board members. You need to work with the Biggest Broker in the World! In fact, one of those board members knows one of the top executives from the Biggest Broker in the World! from his country club.
The Result: The Biggest Broker in the World! handles the insurance for companies like Microsoft, Dell and Cisco. Their best talent handles those accounts. Their average account brings in $50,000 of revenue in both commissions and other fees. All of your policies combined will throw off a total of twelve hundred bucks of income. You will have a lot of questions and need a lot of hand holding. Your company will change a lot over the next couple of years – hiring and firing, adding locations, new products, new client contracts, etc. The Biggest Broker in the World! assigns you to their D team – maybe a recent college grad, maybe a service center…..until you can be more profitable for them. Like when you are about to have your IPO. You’ll wait won’t you? And will you also please let them know when you are bigger, cause no one at their company even knows they insure you.
The Butcher, the Baker and the Candle Stick maker
Why: You already bought a policy from the Buddy (for this segment let’s call him the Butcher). Now you open an office in San Jose. The Butcher doesn’t have a license in CA and suggests that you contact someone local out there. He knows a guy from insurance school, the Baker. You call the Baker and he is happy to set you up with a set of new policies for your California office! Next, you land that big round of VC money and the term sheet says you need Directors and Officers (D&O) insurance. The Butcher and Baker both say they can do it for you but you’re not so sure. This one seems a little more sophisticated. The VC suggests a broker that they use, that specializes in D&O insurance, the Candle Stick maker. This guy drives his Benz to your office, tells you about how he handles the D&O insurance for the last four IPO’s in the country and assures you that you are with the right broker (NOTE: some brokers specialize in specific types of policies as opposed to industry segments where they can handle all types of insurance for that niche. This happens a lot with D&O as the premiums are usually high, and there is little or no service work involved – so they throw off a lot of income to a broker. Hence the Benz.). He sets you up with a state of the art D&O policy. It is the most expensive insurance policy you have ever seen.
The Result: You have three brokers. None of these characters communicates with the other. You have overlapping coverages and therefore are paying duplicate premiums. None of them feel like they are “in charge” of your account, so they don’t make any recommendations, review/update coverage or take much of an interest in your company. None of them realizes you have salespeople working from their homes in 6 States and now each State’s insurance department is fining you for non-compliance on Workers Comp. You have bills coming in from 3 agents, at least 3 insurers and your bookkeeper can’t figure out which bill is for which policy. A new client contract calls for evidence (a certificate) of insurance. Hmmmmm, guess you gotta call all 3. You have a claim and are unsure which policy would cover it, so you call all 3 brokers, none of whom think their policy will cover it. But go ahead and send it in the insurers will fight it out. Ahhh, music to your ears while your company is getting sued…
So, when it comes time to get insurance – maybe the bank, landlord or VC is requiring it – rather than just hiring anyone so you can check a box and move on, spend a little extra time selecting your broker. It will pay dividends down the road. Here are some questions you should consider asking a prospective broker:
- What other companies in my industry/like mine do you work with?
- Can I call someone at those companies and ask about your work?
- My company is poised for growth an we expect a lot of moving parts – and insurance is not our main consideration. How will you help us stay on top of these changes so we don’t miss anything?
- Do the insurers you work with specialize in my niche and offer industry specific coverage?
- What special services do you provide that will help me save time, reduce my premiums and minimize the possibility of us having a claim?
- How much time should I expect to spend on completing applications?
- Can you describe are your smallest and largest clients?
- Do you handle all areas of insurance for companies like ours or just one type of coverage?
- Do you have any group buying programs where I can leverage the power of a bigger group in my industry?
Last week I attended the annual PLUS (Professional Liability Underwriting Society – yes, insurance and acronyms go hand in hand) D&O Symposium. People from the legal and insurance industry, from all over the world, attend this conference to discuss current trends in litigation and Directors and Officers Liability insurance. Much of the content revolves around securities litigation and corresponding D&O insurance coverage for public companies (a couple of quick observations from leading legal minds in public company securities litigation: settlement values are on the rise, insurers are fighting harder to get policy holders to contribute to claims, multi-layered programs are creating increased legal expenses and insurer in-fighting, as much as $6-$7MIL is being spent on legal before a motion to dismiss is even made…). However, there are always some good nuggets on D&O for Private companies as well. What I have found interesting at this event over the past few years is that all of the speakers (underwriters, brokers, company executives, lawyers) continue to be confounded by the fact that the D&O market has been so soft for so long. The insurer’s claims experience simply does not justify it – leaving just a competitive marketplace as the reason for the continuation of level or declining premiums (over 50 insurers competing for D&O premiums). While this is great news for insurance buyers for now, a couple of the “blue chip” long-term players expressed their interest in walking away from accounts, not wishing to participate in a commoditized purchase. It would be a bummer to have to choose between Thunderbird Mutual and Big Bob’s Discount Insurance Co as your D&O insurer. **SHAMLESS PLUG: If you want a quote for D&O from an A rated insurer click here to apply in an online, secure environment.**
The conference opened with a video called Who Watches Over Your Money? that was made to promote the book Money for Nothing by John Gillespie and David Zweig. I have not read the book, but it apparently deals with corporate excesses and mismanagement which resulted in the economic collapse. The short video has some interesting factoids – check it out:
Emerging companies require unique insurance coverages during each stage of their development. While each company will have it’s own specific risks (which must be evaluated independently) there is a pattern of typical coverages that most companies will require at each stage. We have categorized the stages into the following four areas:
Stage 1 – Research & Development
Stage 2 – Growth Phase
Stage 3 – IPO
Stage 4 – Mature Company
Outlined below are the typical insurance coverages, itemized by stage.
Stage 1 – Research & Development
The first stage is usually when the company is being conceptually formulated, partnerships are established, and funding is sought. There are usually few employees in a small office. Insurance needs are somewhat minimal, and typically driven by lease requirements or required by law.
• General Liability for office space (possibly an Umbrella depending on lease requirements)
• Property Coverage for Physical Assets
• Business Interruption coverage including loss of R&D materials
• Workers Compensation & Disability as required by law
Stage 2 – Growth Phase
Typically this stage will be when outside funding is received, products are launched to market, employees are hired and there is possibly some International expansion. Insurance issues take on a bit more complexity. Client contracts often trigger the placement of these coverages.
• Errors & Omissions for intellectual property, privacy, and Internet services negligence which causes financial or other no-tangible loss to a third party
• Directors and Officers liability to protect from shareholder and employment related suits
• Crime coverage for employee theft, forgery, computer fraud, ERISA requirements
• Global Companion Policy to expand all coverages to a worldwide basis
• Employee Benefits including medical, dental, life and disability coverages
• Key Man Life insurance for founders or other key employees (often a VC requirement)
Stage 3 – IPO
The biggest change in a company’s insurance program at this stage is the enhanced protection required to fend off shareholder/class action suits. This takes the form of a restructured D&O policy, and negotiating the correct coverage is a very specialized practice. Additionally, most liability coverages should be increased as the higher profile of the company may translate into claims susceptibility.
• Restructured Directors and Officers Liability insurance which may include several carriers to achieve an appropriate coverage amount
• Separate Employment Practices Liability coverage
• Employed Lawyers coverage for in-house counsel
• First Party “loss of revenue” protection for denial of service, loss of data, breach notification costs and other web specific losses
• Loss Control services such as website assessments and monitoring, employee ergonomic evaluation
• Patent infringement coverage
Stage 4 – Mature Company
At this point a solid risk management foundation should be in place and monitoring the company’s growth and diversification becomes the biggest concern. Acquisitions can cause material changes to the company’s business risks. As the company has reached maturity and the insurance costs have subsequently increased, there is often room for creativity at this point in terms of the funding of the risk management program.
• Merger and Acquisition policies to protect against acquired and assumed liabilities
• Self-funding considerations
• Participating Workers Compensation policies (which pay dividends based on favorable loss experience)
• Local policies placed in foreign countries for subsidiaries and owned locations
• Loss Mitigation policies explained to management for any suits that are non-insurable (this is an insurance backed funding mechanism)
This entire post can be found in the document library. Or, if you can’t fall asleep, you can listen to an interview on this subject that I did with Dave Lavinsky of Growthink (Dave is great, I sound like I died three weeks ago).