Amidst the frenzied chaos of launching and growing your startup business, it’s important to take stock and assess your risk exposure. From employee discrimination lawsuits to workplace injuries to cyberattacks, startups can face a wide variety of threats. 

That’s why it’s important to invest in comprehensive commercial insurance. With the right policies in place, you can ensure that your startup is protected and prepared for any unexpected events.

Do I need business insurance for my startup?

Startups of any stage can benefit from business insurance coverage, from the solo entrepreneur to large, venture-backed organizations. While you may think that smaller businesses are less exposed to business risks, the opposite is actually true. 

Smaller businesses tend to have fewer established procedures, resources, and systems in place to be able to effectively prevent and manage risk, meaning if or when something happens, they are less prepared and may be more susceptible to financial failure.

Business insurance comes in many forms and can be tailored to startups and small businesses of any kind. Every company has a different set of risk exposures, and it’s important to understand what insurance coverage makes the most sense for your business. 

While a small software startup may be concerned with the threat of data breaches, an upstart food delivery service may be more concerned with auto liabilities.

Ultimately, securing commercial insurance coverage can be an important part of your company’s overall risk management strategy. 

For startups, in particular, having the backing of a strong insurer will not only provide financial protection in the event of a lawsuit or disaster, but it can also signal to investors, customers, and employees, that your startup is taking the right steps to set the business up for long-term success.

Is business insurance legally required?

Business insurance for startups is generally not required by law. There are a few types of commercial insurance, however, that are required, depending on the type of business and the state you operate in. While regulations may vary by state, typically, the required coverages include:

• Workers’ compensation insurance, unemployment insurance, and disability insurance if you employ others
• Commercial auto insurance if you own or lease vehicles in the business’s name
• Professional liability insurance for certain types of professions
• Liquor liability insurance if you sell alcohol

In many states, unemployment and disability are programs administered by the state government and may be automatically included in your payroll tax filings. For other insurance types, you’ll need to purchase coverage from an insurer.

What types of insurance do startups need?

There are a number of commercial insurance types that may be relevant for your startup, depending on your company stage, industry, and other factors. Below are some of the more common coverages for businesses in the startup phase:

Commercial Property Insurance

Commercial property insurance protects the value of your business property, including buildings and office space, furniture, computers, inventory, and more. Property insurance provides funds to repair and replace business property that is damaged or destroyed by covered perils, which commonly include fire, windstorm, theft, vandalism, explosion, lightning, and water damage. 

For startups leasing office space, it’s likely you’ll be required by your landlord to secure commercial property insurance as a condition of your lease.

In addition, for those startups that are home-based businesses, be aware that homeowners and renters insurance policies often exclude coverage for business property, so commercial property insurance may be necessary for coverage.

Example:

• A fire breaks out in the break room of your startup’s downtown offices. The fire is contained to the break room, but the smoke has damaged the walls, furniture, and equipment throughout the office. Commercial property insurance would pay to repair the office and replace any damaged furniture and equipment.

Workers’ Compensation Insurance

Workers’ compensation insurance provides financial and medical benefits for employees who are injured on the job or suffer occupational diseases. This coverage also provides benefits to dependents in the case of a work-related death.

While you may consider your startup to operate a fairly safe work environment, it’s impossible to predict when an accident or injury may occur. For many office jobs, repetitive stress injuries are a common occurrence. And there’s always the chance for someone to injure themselves while lifting a heavy box or tripping and falling in the office. Workers’ comp can provide for medical expenses and a portion of lost income if an injured employee is unable to work while in recovery.

Workers’ comp is one of the few commercial insurance types that is legally required by law in almost every state. Depending on the state that your startup operates in, you may be required to secure this coverage once you’ve hired your first, second, third, fourth, or fifth employee. Make sure you’re up to date with state workers’ compensation laws, as failure to secure adequate coverage can result in serious civil and criminal penalties.

Example:

• One of your database administrators develops carpal tunnel syndrome and requires medical treatment. He must undergo surgery and will be unable to perform his regular work duties while recovering. Workers’ compensation insurance would cover his medical expenses and part of his lost wages while he is in recovery.

Directors and Officers (D&O) Liability Insurance

Directors and officers (D&O) liability insurance provides protection for the personal liability of directors and officers of a company while they are performing their roles as directors and officers. This coverage is important to protect your directors and officers if they are accused of making management errors and named personally in a lawsuit by third parties, including employees, customers, vendors, regulators, creditors, and others.

For startups that have received outside funding or have a board of directors, D&O insurance is often looked upon as a requirement of doing business. Board members and investors look for this protection to ensure company executives have the freedom to make difficult management decisions without fear of putting their own finances at risk.

Example:

• An administrative assistant to the CTO at your startup was recently fired from the company. She files a wrongful termination suit against your company and your CTO, alleging that she was the victim of sexual harassment and was fired for spurning the sexual advances of your CTO. Directors and officers liability insurance would provide coverage in the lawsuit.

Employment Practices Liability Insurance (EPLI)

Once your startup starts hiring others, it’s important to consider employment practices liability insurance (EPLI), which provides financial protection for your business against lawsuits by current, past, or prospective employees accusing your business of wrongful treatment such as discrimination, harassment, wrongful termination, or other employment-related issues. 

Startups may be particularly vulnerable to employment claims, given the fast-moving nature of building a business. Oftentimes, startups operate without clear hiring and firing guidelines, an employee handbook, or regular performance review procedures, creating greater risk for employment issues.

Example:

• A saleswoman at your startup claims she was the victim of sexual harassment over a six-month period. She presents copies of emails, texts, and internal chat messages as evidence of harassment from her coworkers and managers. She sues your startup for damages. EPLI would provide coverage for the lawsuit.

Fiduciary Liability Insurance

Startups that offer benefits to their employees, including stock options, 401(k) plans, pensions, or health benefits, should consider fiduciary liability insurance, which provides protection against claims of mismanagement of these plans. 

Managers of these benefit plans are considered fiduciaries, who are expected to act in the interest of plan participants and may be held personally liable for any mistakes or mismanagement of employee benefit plans. Fiduciary liability insurance offers a layer of protection for your company and employees involved in fiduciary roles.

Example:

• The human resources manager at your startup has made a mistake in an employee’s health insurance plan, causing the employee’s benefits to lapse prematurely. The employee has an underlying medical condition that requires significant medical expenses. Due to this lapse in coverage, she must pay for her medical bills without insurance coverage. She sues your startup for damages. Fiduciary liability insurance would provide coverage.

General Liability Insurance

General liability insurance protects your business against third-party claims of bodily injury and property damage. A basic coverage for all businesses, general liability can cover the cost of medical expenses, legal fees, and other damages if a third party is injured or their property is damaged on your business premises or as a result of one of your products.

For many startups that lease office space, general liability insurance will be required by your landlord. Your offices may receive visits from partners, vendors, and other members of the public, meaning you could be held liable for any injuries suffered on your property.

Example:

• A potential client is visiting your robotics startup’s offices for a scheduled meet and greet. You give the client a tour of your robotics lab, and while walking through the facility, the client trips over some tools left on the floor. The client falls onto some machinery and suffers severe lacerations. Your general liability insurance would cover his medical expenses.

Professional Liability Insurance

For startups that provide professional services or advice, professional liability insurance, also commonly called errors and omissions insurance, can provide coverage against lawsuits claiming negligence, mistakes, or any failures in your services.

Different from general liability insurance, which protects against lawsuits claiming bodily injury or property damage, professional liability insurance provides coverage for third-party claims of financial losses.

Example:

• Your mobile app development startup is hired to create an application for a local supermarket chain. Your team failed to do extensive testing on the app, and when the app was released to the supermarket’s customers, it caused phone failures for a subset of customers. The supermarket chain had to pay another company to fix the issue with the app. They sue your startup for damages.

Cyber Liability Insurance

Cyber liability insurance provides coverage against first- and third-party losses caused by cyber threats, including hacking, data breaches, denial of service attacks, and more. For startups that store sensitive client data, from credit card information to protected health information, cyber liability insurance can help cover the costs of dealing with a data breach and addressing any related lawsuits.

Example:

• Your health technology startup is hacked by cybercriminals. They steal customer data, which includes protected health information. You must hire outside consultants to help remediate the data breach and find the root cause. When your customers find out about the breach, they sue your business. Cyber liability insurance would provide coverage for any lawsuits as well as expenses you incur in fixing the data breach.

Additional Insurance Coverage

• Commercial auto insurance protects not only the value of your company vehicles but also your startup from liability if you or one of your employees is found to be at fault in a car crash. If your startup owns or leases vehicles, commercial auto insurance is a must-have coverage, and almost every state has minimum requirements for auto liability insurance.
• Product liability insurance protects your startup from financial and legal consequences as a result of bodily injury or property damage due to the use of your startup’s sold goods or products. If your startup sells higher-risk products, like children’s toys or pharmaceuticals, product liability insurance is key to protecting your business from liability.
• Key person insurance is a form of life insurance purchased by a company on the lives of key employees. Key person insurance can help your startup survive losing a person who is critical to the business. When a key employee dies unexpectedly, key person insurance can provide essential funds so that the business can continue operating.
• Business income insurance, also called business interruption insurance, covers lost income and operating expenses if your business property is damaged to the point of needing to cease operations. This is especially important for startups in retail or hospitality that heavily rely on their commercial spaces.
• A business owner’s policy (BOP) combines the major property and liability risks that small businesses face into one convenient package, commonly including general liability, commercial property, business income, and extra expense coverage. BOPs are highly customizable and many insurers offer BOPs tailored specifically to startups.

Insurance Coverage for Your Employees

Part of protecting your business also means providing the right coverage for your employees. You can sponsor group insurance plans for your employees to provide financial protection in their time of need. A comprehensive employee insurance plan can also serve as a way to attract and retain top talent.

Group health insurance helps your employees pay for medical and healthcare expenditures, including everything from primary care to hospitalizations and surgeries. Offering health insurance to your employees can not only keep your employees in better health, but it can also help to retain your employees.

Group life insurance provides a financial payment to an employee’s family or other survivors if the employee unexpectedly dies. The death does not have to be work-related. Although individuals can purchase life insurance on their own, as an employer-sponsored group, you can usually obtain better rates than an employee could get on their own.

Group disability insurance provides income to employees who cannot work as a result of non-work-related injuries.

How do I get business insurance for my startup?

You have several options when choosing where to purchase insurance: brokers, agents, and direct writers.

Direct writers are insurance companies that will sell you insurance directly, without the use of agents or brokers.

Insurance agents are independent companies that represent insurers in the sale of insurance. Captive agents represent only a single insurance company. Independent agents can represent more than one insurer, and can help you shop around with different companies.

Insurance brokers are independent companies that represent your startup rather than representing the insurer. Brokers can also help you compare prices and policies from competing insurers.

Brokers and agents are paid by the insurance company through commissions for the insurance policies they sell. The commissions are a percentage of the premiums that you pay, and the brokers and agents are paid for every year that you renew your policy.

Usually, the price of the same insurance policy from the same insurance company will be the same whether you buy it through a broker, agent, or direct writer. However, in some cases, brokers will charge your company a fee, which they should disclose to you in advance.

How much is business insurance for startups?

Pricing for business insurance varies widely and depends on a number of different factors, including:

• Coverage type
• Amount of coverage
• Industry
• Location
• Number of employees
• Claims history

AdvisorSmith has analyzed the average costs of several types of business insurance, including general liability, cyber liability, and product liability insurance. Averages, however, may not completely reflect the pricing your specific startup will receive.

In order to get an accurate estimate on pricing, it’s best to get a quote from a reputable insurance company. Below we’ve highlighted a few of our trusted partners who offer a variety of business insurance policies:

Provider	General Liability	Professional Liability	Business Owner's Policy
Embroker	??	??	??
CoverageSmith	??	??	??
CoverWallet	??	??	??
Hiscox	??	??	??
Thimble	??	??	??

Final Word

Running a startup can be challenging enough—the last thing you want is a lawsuit on your hands or an unexpected disaster to derail your plans and be a drag on your finances. Make sure you’re securing adequate commercial insurance coverage for your startup, particularly as you enter new and different phases of growth. From securing funding to hiring employees to releasing a product, there are different startup insurance coverages that can protect your business along every stage, ensuring that you remain focused on building a lasting and successful company.