The product is in beta testing. You and your partners are working well together. You are graduating from a coworking space to a private office. You even formalized your idea into a company, whether a corporation, LLC or partnership.
What have you missed?
Plenty, if your business planning didn’t include insurance.
When the energy is high and the code is flowing, the I-word is the last thing new entrepreneurs want to think about. But running a startup without basic insurance coverage is like driving a school bus and being personally liable for anything and everything that happens.
Owning and operating a business – any business – carries inherent risks. Litigation and regulatory compliance are among them. Even if you’ve done absolutely nothing wrong, you and your company must hire attorneys to handle even frivolous complaints, an unplanned expense that can shut down a new or bootstrapped startup.
Here are 3 costly insurance-related startup mistakes and how to avoid them:
#1. Not having professional liability, or errors and omissions, coverage
Assuming your General Liability business policy includes professional liability coverage is a mistake. They are separate policies and you need both.
The basic idea behind E&O Insurance is that it covers you or your company for real or perceived mistakes in services provided. In such a claim, a client or customer wants you to pay for losses incurred from a service you provided, didn’t provide or didn’t perform as expected. For doctors and dentists, it’s called malpractice insurance. It’s known as professional liability insurance among accountants, architects and lawyers. Insurance agents and financial planners carry E & O policies.
Many professions require such coverage to remain in good standing with licensing and regulatory authorities. But any company that provides a service to a client for a fee has professional liability exposure. IT professionals, web hosting companies, freelance developers and digital marketing agencies are just a few such categories.
Because technology has blurred the lines between what is a product and what is a service, the pool of activities with E&O exposure is bigger than you think. The cloud has rebooted SaaS offerings in a big way. What is an app or a project management platform? It is a piece of software sold as a SERVICE.
Startups with a big web presence and any companies engaged in e-commerce that collect personal information also will want to look into a Cyber Liability Policy. Professional Liability insurance covers what you do or don’t do. Cyber policies cover acts by third parties, such as hackers and data breaches.
#2. Not having business interruption coverage
Have you noticed an increase in what meteorologists call “extreme weather events?”
Tornados, monster snow and ice storms, floods and hurricanes disrupt businesses, sometimes shutting them down for weeks or even months. Just ask anyone in New York or New Jersey who was affected by Superstorm Sandy.
True, cloud computing and remote teams, which are common to many startups, make continuing work much easier. But the more you grow, the harder it is to provide seamless product delivery and customer service during a natural or man-made disaster.
Check your coverage carefully. Business Interruption coverage may be included in either a General Liability or Business Property policy, or it may need to be added.
A “business interruption” is considered any forced closing of a business because of a covered property claim. If your office is damaged by fire or flood, Business Interruption insurance will cover your loss of income during repairs – or during your hunt for new digs.
This type of coverage is also valuable because it reaches into your supply chain. If, for example, you designed and now sell a must-have travel coffee mug so gorgeous it belongs in a museum, chances are a vendor fabricates the product for you. If the vendor’s business is interrupted and you can’t fulfill orders, business interruption insurance steps in.
The idea is to give your vendors time to recover or you time to find another vendor. Business Interruption insurance, however, is not a blank check and comes with specified time limits.
#3. Skipping liability and property insurance because you rent office space
It wasn’t all that long ago that nearly all commercial leases required a three-year minimum commitment and proof of general liability and personal property insurance. Many still do.
But the rise of creative workspaces to better serve the flexible needs of startups has both lowered the barriers to “being official” and increased the risks in cutting corners.
Leases with terms as short as three or six months give new companies the freedom to grow. Freedom is great. Still, read your lease documents carefully.
Most likely, when you signed such a lease you were either asked to provide proof of general liability and personal property insurance OR sign a waiver in which you promise to not hold your landlord responsible if something goes wrong. Sure, you think, easy call. What could go wrong?
You’d be surprised.
- After a near all-nighter, your exhausted team leaves in the wee hours Saturday. By Monday morning, a thief has made off with all your gear – desktop computers, external hard drives, video cameras, editing stations, the works.
- Lightning strikes, literally; the sprinklers perform admirably and contain the fire. In this case performing admirably means soaking your electronics and ruining the furniture, which also smells like smoke.
- Speaking of furniture, you’ve gone for that industrial loft motif with metal and wood – high tables and backless stools, which is how you and your team prefer to work. A client stops by to check on a project’s progress and saddles up alongside you at one table.After a brief demo, the client wants to ponder and begins to move into his or her thinking position. Unfortunately for both of you, this involves leaning back in a traditional office chair and staring at the ceiling.The client falls backwards, head first, off the stool, needs stitches and is diagnosed with a concussion. The client wants you to pay for the ambulance ride, emergency medical care and two weeks of lost income.
Under all three scenarios – theft, fire, and on-site accident – the financial hit would be at least $10,000, probably more. Compare that to the cost of liability and property coverage.
Be Smart About Taking Risks
Entrepreneurs as a rule are risk-takers, and that’s great. We want innovators to push the envelope, disrupt old systems and find new solutions that make our lives better.
Taking risks is one thing. Inviting them is another.