When starting a new business, there are many risks and expenses for founders to consider, and more often than not, there are also very limited resources.

Founders are usually pre-occupied with the enormous time and cost that goes into building the new product or service offering, protecting any proprietary information or intellectual property they are creating and building the right team to ensure the success of the venture. However, one item that should not be overlooked is the need for adequate insurance coverage, as one potential uninsured claim could have a devastating effect on the success of the venture. 

...one potential uninsured claim could have a devastating effect on the success of the venture. 

To determine what insurance is needed, a startup should consider the risks that are likely to arise in its business and the potential parties that could make claims.

As a starting point, all businesses need general liability insurance – also known as business liability insurance. This type of policy protects businesses against claims for bodily injury and property damage arising out of operations, premises and products, as well as personal injury and advertising liability claims such as libel, slander and copyright infringement. Most contracts that you need to sign as a vendor or service provider will require that you maintain a certain level of general liability insurance. 

In addition, all businesses should obtain professional liability or errors and omissions (E&O) coverage. This type of policy covers financial losses arising out of an error or omission in the performance of professional duties. E&O insurance is particularly important for small businesses providing technology services or products.

Whether your startup owns or leases property, you will also want to obtain commercial property insurance. This type of coverage will protect you against damage to your buildings, equipment, furnishings and inventory in the event of fire, storms, theft and vandalism. It’s important to review the scope of coverage as certain types of catastrophes such as earthquake and floods are often not covered.

A startup also wants to protect itself against losses that may occur from unanticipated interruption in its business operations. Therefore, it can purchase business interruption insurance which covers your business for loss of income or additional expenses incurred as a result of a covered peril.

In addition to the foregoing “basic” coverage, there are several other types of coverage to be considered.

Your business will have employees and therefore will require workers’ compensation insurance and employment practices liability coverage which cover against claims by employees injured on the job and claims arising out of alleged wrongful acts such as discrimination, harassment and wrongful termination.

The loss of a key person could derail the entire business...

You will also want to consider key person insurance for the death or disability of the founders or key employees. This insurance is payable to the company and is often required by outside investors, who invested in the founding team and its ability to implement the business plan. The loss of a key person could derail the entire business. In businesses without outside investors, key person insurance is occasionally used so that the company can buy out the ownership interest of an owner that dies or becomes disabled. 

Startup businesses that have outside investors will also be required to obtain directors and officers (D&O) insurance to insure against lawsuits brought against the individuals serving in such capacities. D&O coverage is intended to work, in the first instance, in tandem with corporate indemnification provisions, which are generally contained in a company’s by-laws, certificate of incorporation, indemnification or employment agreements.

Even startups without outside investors may determine that it is advisable to obtain D&O coverage, particularly if they have directors that are not part of the founding ownership team... 

As a general proposition, the corporate entity indemnifies its directors and officers for their legal expenses, judgments and settlements arising from actions and investigations related to actions taken in their corporate capacity. Even startups without outside investors may determine that it is advisable to obtain D&O coverage, particularly if they have directors that are not part of the founding ownership team. 

D&O policies typically contain at least two coverage parts, commonly known as “Side A” and “Side B.” Side A coverage protects the personal assets of the directors and officers by providing direct insurance for such individuals when the corporation does not or cannot provide indemnification. Side B coverage provides the company with what is effectively balance sheet protection by reimbursing the corporation when it is required or permitted to indemnify its directors and officers. Some D&O policies also contain “Side C” coverage for losses incurred by the corporation itself. 

If your startup manufactures products for general sale, you will want to obtain product liability coverage. The manufacturer of a product generally has strict liability for manufacturing defects that cause bodily injury or property damage to a third party. Usually if you are selling your products to retailers for resale to the general public or to a third party for incorporation into another product (e.g. selling a part to a manufacturer of a car), they will require that you carry a certain level of such coverage. 

...the protection afforded well outweighs the cost of reasonable insurance coverage.

Finally, as cyberattacks continue to increase in number and sophistication, and legal requirements in data security and privacy heighten, startups should consider obtaining cyber liability coverage insurance. These policies typically have multiple insuring agreements – depending upon what the company wishes to purchase and what risk the insurer is willing to underwrite – divided into two buckets: (1) first-party liability and (2) third-party liability.

First-party liability insurance covers damages sustained from a cybersecurity incident involving the data and information systems a company possesses. Insuring agreements generally found to provide coverage for first-party loss include system compromise/response services (sometimes referred to as crisis management coverage), extortion (e.g., ransomware attacks) and business interruption.

System compromise insuring agreements generally cover the costs incurred by a company to respond to a cybersecurity incident, including computer forensics and legal fees incurred in the investigation of the incident, notification costs and costs for public relations to mitigate brand name damage. Some first-party cyber insurance also provides coverage for fraudulent fund transfer resulting from business email compromises and other phishing attacks. 

Third-party liability insurance covers liability owed to others as a result of a cybersecurity incident. Insuring agreements typically cover loss resulting from network security and data breaches, website media, payment card industry (PCI) fines and regulatory defense. Network security/data breach coverage typically covers defense and liability costs if the company is sued because of a cybersecurity incident.

Website media liability coverage typically covers disputes involving the content of the insured’s website or other social media. Insurance for PCI liability can cover both fines for breach of the payment card industry’s data security standards, as well as the costs of any PCI-led investigation.

Regulatory defense provides defense and liability coverage for a regulatory agency enforcement action brought because of the breach of data security and privacy requirements. 

While this is complicated and will require dedication of a certain amount of your limited resources to pay insurance premiums, the protection afforded well outweighs the cost of reasonable insurance coverage. There are many brokers and carriers that specialize in packaging the right insurance for startups, as well as new insurtech businesses that can help your company meet its insurance needs.

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[Lori Smith, Josh Mooney, Maurice Pesso, and Daryn Rush are partners at law firm White and Williams.]