Insurance for Your Startup: Is It Worth It?

As your company grows, you should start thinking about insurance as a way in which to protect your business.

Types of Insurance

Buying insurance is an up-front cost. Whether it is worth it is a balancing exercise, comparing the cost of the insurance against the chance of an event happening for which you would need it; and how much that problem might cost.

There are two main types of insurance:

1. Insurance that protects your property – this could be:
   • your physical property; your building and its contents, including your IT system (potentially the software as well as the hardware)
   • your intellectual property: your ideas, designs, creations, inventions etc.
2. Insurance that protects against your legal responsibility (liability) for causing harm to other businesses or people – this can help cover the cost of lawsuits.

You cannot insure against everything. So, for example, generally you cannot insure against your business failing for purely commercial reasons. However, taking out the right insurance might just protect your business from other threats to its existence.

Acquiring Insurance

It is important that any policy taken out is right for you. This means finding insurance that covers what you want it to and also making sure that the level of coverage (how much it would pay out) matches your needs at various stages of growth. Many insurance companies, including some of the largest, have insurance products that are tailored to the particular needs of startups.

You could go straight to one of the insurers that offer guidance to startups, but be aware that they will be trying to sell their own products.  Many of our clients choose to work through a specialist broker who is able to shop around the market.  They will act for you in finding the right insurance. It makes sense to find out their charging structure in advance. Most are paid for their services by taking a percentage of the purchase cost (premium) that you pay for the cover; others might charge a fee.

When seeking advice, you should start with whether any insurance is required by law.  For example, in some circumstances, you must have insurance covering your employees, including workers’ compensation and disability insurance, and business-owned vehicles.

If you are thinking of taking out insurance, you must provide all of the information that the insurer requires. If you don’t, the insurer might be able to back out or deny a claim by saying that it was misled about the risk. Also, you must comply with the policy conditions otherwise the policy might not pay out when you need it. Your broker or insurer will define your obligations.

Finally, if you have insurance, review it periodically with assistance from your adviser to make sure that it continues to match the changing needs of your business