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While getting insurance can be both a nuisance and unwanted expense, the alternatives – having no insurance, or getting the wrong coverage – can cripple your company. Some insurance is required by law and there are stiff penalties for non-compliance.
In other situations, it’s a prudent business move to buy a policy for the claims that you simply cant afford to sustain, such as a lawsuit or a destructive fire.
Emerging venture-backed companies require unique insurance coverages during each stage of their development.
Of course, each company will have its own specific risks (which must be evaluated independently), but there is a pattern of typical coverages that most companies will require at each stage.
We’ve broken down the typical insurance needs for a startup at each of the following four stages:
Stage 1 – Research & Development
Stage 2 – Growth Phase
Stage 3 – IPO
Stage 4 – Mature Company
Click here to see the typical insurance coverages for each stage of growth >
John Moccia is a Partner at Rollins Insurance, whose clients have included Silicon Alley pioneers like Earthweb and Uproar and current companies like FourSquare, Etsy, KickApps and Oddcast. This post was originally published at the Rollins blog, and it is re-published here with permission.
The first stage is usually when the company is being conceptually formulated, partnerships are established, and funding is sought.
There are usually few employees in a small office. Insurance needs are somewhat minimal, and typically driven by lease requirements or required by law.
• General Liability for office space (possibly an Umbrella depending on lease requirements)
• Property Coverage for Physical Assets
• Business Interruption coverage including loss of R&D materials
• Workers Compensation & Disability as required by law
Typically this stage will be when outside funding is received, products are launched to market, employees are hired, and there is possibly some international expansion.
Insurance issues take on a bit more complexity. Client contracts often trigger the placement of these coverages.
• Errors & Omissions for intellectual property, privacy, and Internet services negligence which causes financial or other no-tangible loss to a third party
• Directors and Officers liability to protect the management team and Board of Directors from shareholder and employment related suits
• Crime coverage for employee theft, forgery, computer fraud, ERISA requirements
• Global Companion Policy to expand all coverages to a worldwide basis
• Employee Benefits including medical, dental, life and disability coverages
• Key Man Life insurance for founders or other key employees (often a VC requirement)
At this point a solid risk management foundation should be in place, and monitoring the company's growth and diversification becomes the biggest concern. Acquisitions can cause material changes to the company's business risks.
As the company now has more cash, it also has the ability to sustain smaller losses without a devastating result. This allows for some new ways to set up the insurance which will help contain costs.
• Increased Deductibles and Self Funding considerations
• Merger and Acquisition policies to protect against acquired and assumed liabilities
• Participating Workers Compensation Policies (which can return a high percentage of the premium to you if you have no or few claims)
• Local policies placed in foreign countries for subsidiaries and owned locations
• Loss Mitigation policies. Most companies will have claims/suits at some point. With this type of policy, you work with the insurer to 'buy out' your claim at the amount that you choose, and anything above that is the insurer's responsibility.
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