Startup E&O insurance - Checking the box
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.