Business Insurance For Startups: How Much It Costs And Why You Need It

Business Insurance For Startups: How Much It Costs And Why You Need It

If you are a startup business, you obviously have a lot to juggle. That said, business insurance should be a top priority as you move forward. Go ahead and Google “lawsuit and startup” (or maybe don’t if you’re panic-prone) and the news will run the gamut.

Even if you aren’t a doomsday type of buyer, there are many other reasons to be insured. Maybe you need to show insurance to your investors and clients before they’ll join you on your venture, or maybe you need to secure commercial property insurance to set up shop in a physical space.

Bottom line: You need insurance.

Even if your startup is a sole proprietorship or a limited liability company, the financial impact of a mistake or a lawsuit could cripple your startup or create a situation where your personal assets could be at risk. Why toss the dice?

Read further to see why you need insurance, what kind of insurance you might need, and the most cost-effective ways to secure insurance for your startup.

Why Startups Need Insurance

Business Insurance For Startups: How Much It Costs And Why You Need It

Startups need insurance for the same reasons that any business needs insurance: there are risks involved with starting and running a business, and a mistake or accident could permanently cripple your finances and your chances for success. Since startups, by nature, are new and innovative and 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 wandering around in unfamiliar territory. Time spent worrying about potential pitfalls is time you could be using to build your business: insurance buys you fewer things to worry about.

Also, in some instances, business insurance might be legally required. (If you have even one employee, depending on where your business is located, you’ll need worker’s compensation as a minimum.) Lawsuits and angry customers — and perhaps even upset investors — may be part of your startup’s journey, and the best way to gain some 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 to early to understand what you need and why.

8 Types of Business Insurance Startups Might Need

Business Insurance For Startups: How Much It Costs And Why You Need It

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 covers your expenses should you go to court to defend an accident, an 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 is injured due to an accident at work. This is the foundational insurance policy that every business should have. Accidents happen and this basic coverage makes sure you won’t lose your business when they do. 

Commercial Property Insurance Or Business Owners Policy

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 wind, rain, snow. General liability insurance covers people and commercial property insurance covers things. There is also a Business Owner’s Policy (BOP) that joins commercial property and liability together in a bundle for extra savings.

Commercial Auto

Sometimes a startup will make the mistake of assuming that their personal auto insurance is enough to protect a car driven for work. However, it’s a known fact that even reputable insurance companies look for ways to avoid paying a claim. 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), you will need commercial auto insurance. Don’t assume your personal insurance is enough to cover a vehicle involved in an accident during business hours.

Professional Liability

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 is in the business of giving advice, professional liability protects you in the event that someone feels your advice was harmful, either to them personally or to their company. Thinking of professional liability insurance as malpractice insurance is the best way to understand the various ways people might try to find your company liable.

Cyber Liability

Twenty years ago, cyber insurance protection wasn’t even on the radar of business owners. But 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 in the event that your website or database is hacked and personal information is leaked. 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.

Worker’s Compensation Insurance

If you have employees, you’ll need worker’s compensation insurance to cover you and your business in the event that an employee is injured on the job. General liability insurance will cover an injured customer or client, but an injured employee falls under a different umbrella of insurance — one that is a legal requirement. (As with most insurance policies, however, the legal requirements are state specific.) Workers compensation pays for medical and legal fees if your employees are injured at work.

Employment Practices Liability Insurance

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 claim of discrimination, it could happen, and the costs to defend yourself could become crippling.

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 helps protect your business in the case of a discrimination lawsuit.

Key Person Insurance

Key person insurance is a life insurance policy on the key person/owner of a business. If you die and your startup can’t function without you, what happens? (Insurance is fun to talk about at parties: Hey, let’s talk about all the accidents that could happen or the different ways people might sue you. Also, what if you die?) But also: what if you die? If someone’s brain and 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. If a key person in your startup passes, that insurance money can be used to pay off investors or keep the company from bankruptcy.

How Much Does Startup Insurance Cost?

Business Insurance For Startups: How Much It Costs And Why You Need It

Insurance costs will vary depending on the financial makeup of your company. Insureon analyzed its 18,000 policies of business insurance for companies with 10 employees or fewer and came up with the following numbers: the average cost for business insurance is $1281 annually with the median at $584.

What will affect your insurance costs the most? Well, not everything is in your control: you may need workers compensation as a legal requirement and general liability to work with contractors, but what else could lower or raise the average cost?

  • Your Business Size: What is the physical square footage of your business? What kind of space does it require? A larger space will require a larger policy.
  • Your Business Location: Where you are located will affect your premiums because some states are more accommodating than others toward small businesses and startups. Are you located in a state that is considered small business friendly or lawsuit friendly? Location also factors into other business risks like flooding, crime, and foot traffic.
  • Business Sales Reports: How much money do you make? The more money you make, the more insurance you’ll need. An actuary (someone who assesses your company’s risks) will look at your numbers and see how much you — or they — might stand to lose.
  • Your Business Industry: Some industries are built with more risk than others, and the insurance company will examine all the ins and outs of how your business operates to know the best ways to protect you.
  • Number Of Employees: More employees, more insurance costs.
  • Claim History: As with any insurer, the actuary will also look at your past business history and see if you have made any claims in the past.
  • Types Of Policies: The bigger your business, the bigger the policy. If you don’t have any employees and can stick with general liability, you will pay pennies next to a business that is working to protect employee incomes.

With so many factors specific to your own 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

As with all things in business, finding a cost-effective way to provide services is always at the forefront of a startup owner’s thoughts. Let’s be honest; money is on your mind. As a startup, you might be juggling how to finance your company and are noticing that sometimes loans require insurance. (Your lender wants to know you will be able to fund this asset; insurance gives confidence to lenders if you financing through loans or through grant money.) Maybe your investors require insurance or maybe you already understand its necessity for your peace of mind, and you want to get the cheapest insurance possible.

However, it’s important to understand that a cheaper policy may not be cheaper 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. At that point, you are banking on the best-case-scenario and still not effectively planning for the worst-case-scenario: a business risk.

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. Consider a business owner’s policy which combines both general liability and commercial property insurance.
  • Shop Around: The lowest quote may not always be the best deal in the long run if the company wouldn’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.
  • 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. (Understand that one lawsuit or claim could eat up that whole deductible and may not be cost-effective in the long run; so be prepared to pay that deductible and crunch the numbers.)
  • Find Group Rates: Group rates might be available for your industry and if you can purchase insurance as part of a group, your premiums will go down.
  • Work With An Agent Who Specializes In Business: Not all insurance agents, brokers, or companies are created equally. And certainly, not all of them will understand the specifics of your industry. Go out and find someone who knows your business and can help you understand the
  • 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

Okay. 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. What 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 is cost effective to bundle your personal and business insurance policies. If not, go shopping. 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 for an attack when your company isn’t ready to handle the pressure or the financial fallout.

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