The Complete Guide To Business Insurance For Startups
A business startup will need business insurance to protect assets and manage risks. What types of insurance should a startup get and how much will it cost? Read our guide.
Startup business insurance should be a top priority, as all businesses are prone to lawsuits and mishaps. But startups are especially vulnerable.
Besides risk management, you might also need to show proof of insurance to your investors and clients before they’ll join you on your venture. Maybe you need to secure commercial property insurance to set up a shop in a physical space.
The financial impact of a mistake or a lawsuit could cripple your startup or put your personal assets could be at risk. Don’t gamble with your hard work and livelihood.
The bottom line is that you need business insurance.
Read further to see why you need startup insurance, what kind of insurance you might need, and the most cost-effective ways to secure insurance for your startup.
Table of Contents
- What Is Startup Insurance?
- Does My Startup Need Business Insurance?
- Why Startups Need Insurance
- 8 Types of Business Insurance Startups Might Need
- How Much Does Startup Insurance Cost?
- Ways To Save On Startup Insurance
- Getting Started With The Right Startup Insurance For Your Business
- Startup Business Insurance FAQs
What Is Startup Insurance?
Startup insurance is a group of policies that aim to provide benefits and protection to businesses of all kinds at any point in their maturity, really.
The main differences come down to budget and scale.
Think of it this way — both a 2-year-old business and a 50-year-old business will benefit from having a Business Owner’s Policy (BOP) that bundles commercial property insurance and general liability. But, naturally, the extent of coverage and insurance add-ons (i.e., endorsements and extra policies) each need to sufficiently protect their assets, and employees will look different.
Does My Startup Need Business Insurance?
Yes, your startup needs business insurance. In fact, if you’re a first-time business owner or employer, chances are you’re more prone to costly errors and mistakes that affect your bottom line. Business insurance will give you peace of mind and financial protection when those mistakes inevitably happen.
Why Startups Need Insurance
Startups need insurance for the same reasons that any business needs insurance: there are risks involved with starting and running a business. A mistake or accident could permanently cripple your finances and your chances for success.
Startups are new and innovative, and they often work with up-and-coming technologies. You may not even be able to imagine all the ways you could put yourself at risk.
You need business insurance precisely because you’re dealing with unknowns. Insurance helps take the worry out of the equation and buys you time to focus on your business.
In some instances, some types of business insurance might be legally required.
Lawsuits, angry customers, and perhaps even upset investors may be part of your startup’s journey. One of the best ways to gain confidence and assurance is to protect yourself.
You might need business insurance if you:
- Have a physical storefront/location for your business
- Rent business equipment or property
- Use a car or a fleet of cars
- Advertise or have an online social media presence
- Employ people
- Work with customers
- Provide professional advice
- Want to protect personal assets
- Have investors in your company
In the discovery stage of your startup, you may not need as much insurance as you will later on when you are gaining momentum and adding employees and partners; however, it’s never too early to understand what you need and why.
8 Types of Business Insurance Startups Might Need
For a startup business, the types of business insurance to choose from can be long and tedious to understand. Each type of insurance protects a different aspect of your business and could be required based on business demographics like where you are located, how many employees you have, and what type of risk is involved in your startup.
While individual needs will vary, here are the basic types of business insurance startups should consider.
General Liability Insurance
General liability insurance is the foundational insurance policy that every business should have. It covers your expenses should you go to court to defend against an accident, injury, or damage to property.
Typically, your policy will pay for legal representation, litigation fees, out-of-court settlements, and judgments set by the court. Sometimes called “Slip and Fall Insurance,” general liability will also cover medical bills if a client or customer is injured due to an accident at work.
Commercial Property Insurance
Whereas general liability covers people, commercial property insurance covers things — namely, your business’s property and physical assets.
If you own a commercial property, have a storefront, or have a physical location for your office, then you will need a commercial property insurance policy. This policy covers theft and damage done to your property through vandalism or natural causes such as wind, rain, fire, or snow.
Business Owner’s Policy
A business owner’s policy, often referred to as a BOP, bundles commercial property and liability together at a cheaper rate than if they were purchased separately. Other policies are sometimes included as well.
You’ll need commercial auto insurance if you use your car for business or have employees out driving around for your business, especially if you have a commercial fleet of vehicles.
Sometimes a startup will make the mistake of assuming that their personal auto insurance is enough to protect a car driven for work. But personal auto will leave you seriously underinsured in a business-related scenario, not to mention the fact that the carrier will probably refuse to pay for it.
This type of insurance policy is sometimes called malpractice insurance or errors and omissions insurance (E&O).
If someone in your company makes a professional mistake (an error of judgment) or omits key information that impacts someone financially (an omission), people can sue you. Startup businesses are in a state of flux as they establish themselves and might be more likely to inadvertently make a professional mistake.
If your company gives advice or provides professional services, professional liability protects you should a person, client, or company claim to have suffered harm as a result of negligence or malpractice.
When a hack occurs, there are many legal requirements related to communicating with customers and securing their identities in the aftermath. A cyber liability policy covers the financial fallout of a data breach.
If your business has any type of online presence or if you use a database to store customer information, this provides an added layer of protection should your website or database be hacked and personal information is leaked.
Workers’ Compensation Insurance
General liability insurance will only cover an injured customer or client. Workers’ compensation pays for medical and legal fees if your employees are injured at work.
Employment Practices Liability Insurance
The Equal Employment Opportunity Commission (EEOC) defines eleven different types of possible workplace discrimination: age, disability, equal pay, genetic background, nationality, pregnancy, race, religion, retaliation, sex, and sexual harassment.
Employment practices liability insurance protects you against a discrimination or wrongful termination lawsuit. Even if you can’t imagine one of your employees or startup partners making a discrimination claim, it could happen. The costs to defend yourself could become crippling.
Key Person Insurance
Key person insurance is a life insurance policy on the key person/owner of a business. If someone’s brain or personhood is a big part of a startup’s success, then the startup may be able to insure that person’s life with the company as the beneficiary. That insurance money can be used to pay off investors or keep the company from bankruptcy.
Per the U.S. Chamber of Commerce, disability insurance is designed to assist workers “when they’re unable to work due to short- or long-term injuries, illnesses, or disabilities.” This is an extra layer of security you can provide to employees and staff in addition to workers’ comp. The main difference between the two is that policyholders can file a claim that isn’t necessarily tied to a work-related injury.
How Much Does Startup Insurance Cost?
Insurance costs will vary depending on numerous factors — the financial makeup of your company, the carrier you choose, and the policies you purchase.
You’ll want to start with a business owners’ policy, which averages out at one to a few hundred dollars a month. (A BOP includes commercial property and general liability.) From there, you’ll need workers’ comp as soon as you hire your first employee (excluding Texas — as it is the only state that doesn’t require workers’ compensation).
Research the market for extra policies that are tailored to your specific risks.
Realistically, if you’re starting small, you can expect to pay even less — larger businesses’ insurance data will skew the numbers towards the higher end. Regardless, always check for yourself and/or talk with an expert.
What else could lower or raise the cost of your insurance?
- Your business’ size refers to the physical space it needs (such as square footage).
- Some locations are more expensive for carriers to insure than others — floods, crime, and local laws all affect costs — so your business’s location is another notable factor.
- You’ll need more coverage based on your business sales reports since carriers stand to lose more depending on your income, such as with a business interruption insurance plan.
- Your business industry may be riskier than others, so the insurance company will examine how your business operates to know the best ways to protect you.
- A higher number of employees means more incomes to protect, and with that, higher insurance costs.
- Insurers will also look at your claims history to see how many claims you made and how much you were compensated for losses.
With so many factors specific to your business, it’s important to check with an insurance professional to itemize your needs and the costs associated with each policy.
Ways To Save On Startup Insurance
Let’s be honest; money is on your mind. Finding cost-effective ways to provide services is always at the forefront of a startup owner’s thoughts.
As a startup, you might be juggling how to finance with startup loans and are noticing that sometimes loans require insurance. (Your lender wants to know if you will be able to fund this asset; insurance gives confidence to lenders if you get financing through loans or through startup grant money.)
Maybe your investors require insurance. Perhaps you already understand its necessity for your peace of mind, and you want to get the cheapest insurance possible.
However, a cheaper policy now may be costlier in the long run.
If you start with a higher deductible and a lower limit, your monthly premiums may seem manageable. But one claim could put those entire savings at risk. You’d be banking on the best-case scenario and still not effectively planning for business risks.
Without going light on the coverage you need, here are a few ways you can try to save a few dollars:
- Bundle Policies: Bundling your insurance policies will often save you money. A business owners’ policy is a classic example.
- Shop Around: The lowest quote may not always be the best deal if the company won’t support you when you submit a claim. Research the carriers and their ratings. Five independent agencies (including Standard, Poor, and AM Best) rate the financial strength of an insurance company, and you can use their services for free if you sign up for an account. Brokers like Gallagher Business Insurance will provide you with quotes from a variety of companies.
- Choose A Higher Deductible: A deductible is the amount of money you will pay before your insurance kicks in. Choose a higher deductible, and your premiums will go down. (Note: one lawsuit or claim could eat up that whole deductible, so may not be cost-effective; be prepared to crunch the numbers.)
- Select Group Rates: Group rates might be available for your industry. If you can purchase insurance as part of a group, your premiums will go down.
- Find An Agent Who Specializes In Business: Not all insurance agents, brokers, or companies are created equally. Go out and find someone who knows your business and can help you understand the specifics of your industry.
- Pay Your Premium In Full: It may be cheaper to pay your premiums for the year in one lump sum rather than spread them out in 12 monthly installments.
Getting Started With The Right Startup Insurance For Your Business
Your startup needs insurance, that’s a given. You now have a general understanding of what policies you might need and how to save a few dollars insuring your business.
So, what’s next?
There are many ways to get started. Check with your current insurance company to see if they offer commercial business plans. If so, see if it’s cost-effective to bundle your personal and business insurance policies.
If not, go shopping. Some of the top insurance providers in the nation like The Hartford, Travelers, and Nationwide provide business insurance at great rates. Many sites like Coverwallet, Coverhound, and Insureon will comparison shop for you and walk you through the steps required to make an insurance purchase.
Your startup needs protection.
Don’t make the mistake of leaving yourself vulnerable when your company isn’t ready to handle the pressure or the financial fallout.