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New tech startups are coming onto the scene on a regular basis, as companies look to deliver better experiences to consumers and businesses by harnessing technology. According to Pitchbook, US venture capital investment reached $130.9 billion in 2018 alone. From cryptocurrency startups and direct-to-consumer products to biotech and wellness, the startup scene continues to boom.
When you’re growing your business, it’s essential to protect it against potential risks and mitigate risk exposure by having the right business insurance in place. With the proper coverage, you can operate with the peace of mind knowing that your business can withstand accidents or unfortunate scenarios and lawsuits.
Insurance can seem daunting at first, and your needs will depend on things like your industry, business size, location, and the number of employees you have. As a tech startup, it can be especially challenging, as you might not fall into a clear preset insurance category for carriers. For example, say your business is doing on-demand massage therapy through an app. Are you a software company? A massage company? An on-demand delivery company?
To get the right type of coverage for your business, you can work with startup insurance specialists, who can liaise between you and the insurance carrier to ensure you get the right coverage at the best rates.
Types of insurances to consider
There are lots of considerations to take into account when you are buying insurance coverage for your tech startup, and you need to be able to anticipate any potential risks or liabilities against your business. As your startup grows, adds employees, brings more products and services to market, and raises money, it’s important for tech startups to prepare and get coverage to avoid big losses – let it be money, time, or people.
Key Insurance Coverage Startups Needs
You should consider a wide range of insurance policies to cover different aspects of your startup. In addition to the basic commercial insurance such as General Liability, Commercial Property, and Workers Compensation, some of the most important insurances to consider are:
- E&O: Errors and Omissions insurance, which helps you protect your company against claims coming from your clients.
- D&O: Directors and Officers insurance, which protects founders, executives, and members of the Board of Directors against any damages from lawsuits made by employees, customers, or other third-parties.
- Cyber Liability: Cyber Liability insurance, which protects your startup in the event of security breaches
E&O insurance, or Errors and Omissions insurance, is liability insurance that will protect your company and its employees against claims made by clients for unsatisfactory work or inadvertent mistakes. In other words, E&O insurance is your protection against different types of liabilities that are in correlation with the professional services you provide.
Does your tech startup need the E&O insurance? As a rule, if your business requires you to constantly deal with clients or bill them for services rendered, it would be beneficial for you to get this type of insurance, even if the law doesn’t necessarily require it. The reason to buy E&O insurance is because you’re going to need protection against clients who might, at any moment, accuse you of something you have said or done having been harmful to them or their situation. You need protection against clients who, somehow, aren’t satisfied with the work you did. And you need protection against something you promised to deliver to your client but, for some reason, you were not able to deliver.
E&O insurance, also known as Professional Liability insurance, offers coverage against financial loss resulting from services your business provided. Because mistakes are inevitable, and can occur in any type of business, you should consider getting this type of insurance to keep you from shelling out a significant amount of money just to correct the mistake your business made inadvertently.
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D&O insurance, or Directors and Officers insurance, is a type of liability insurance that protects the company’s directors and officers against claims of wrongful acts, management misconduct, theft, unfair competition, fraud, and more. For founders of a startup company, D&O insurance is your protection against claims that might come from your investors, employees, clients, vendors, and even your competitors.
The question now is: does your company need D&O insurance? Any type of business with an officers committee or a board of directors holds the risk to be sued for various reasons. D&O insurance is often all the more important if you’re looking for funding from investors and venture capitalists because this type of insurance can be a form of protection for them, and it is often a requirement most investors have for investing in a company. By getting this ahead of time, you can speed up the investment process by already having D&O insurance in place.
Many assume that D&O insurance would only be necessary for big companies or public traded companies, when in fact, it’s not. You don’t need to be a billion dollar tech company before you can invest in this type of insurance because, regardless of your size, you can still easily fall into lawsuits that can greatly impact your business.
Cyber Liability Insurance
Cyber Liability insurance is a type of insurance that covers financial losses resulting from a data breach and other cyber incidents. This insurance policy may include first-party and third-party coverage wherein first-party coverage applies to losses caused by the company directly and third-party covers claims against damages resulting from your failure to act.
An example of first-party coverage is if your clients’ data that was stored in your computer system was to get damaged by a virus or stolen by hackers. Your Cyber Liability Insurance would cover the costs of retrieving damaged or stolen clients’ data, including the cost of hiring an expert just to recover the data.
Third-party coverage, on the other hand, covers lawsuits alleging that data breach (or your clients’ inability to access their data on your system) is due to your company’s negligence to provide adequate security and protection.
So, you might be thinking, is Cyber Liability insurance important for your tech startup? The answer is very simple: As your business relies heavily on online activities, the risks of data breach litigations and other cyber attacks are pretty high. Therefore, it’s necessary to protect your business from any cyber attack that will cause a lot of damage to the existence of your business. This can include retrieving very confidential information about your startup'́s earnings and some other personal information (example: personal identifiable information, or PII) that is stored on your system.
How much is insurance for tech startups?
Cost is key when it comes to insurance for tech startups, and businesses usually want the cheapest coverage while not cutting any corners and making sure they have adequate coverage. The short answer is the cost of insurance for tech startups varies. It depends on how much funding you’ve raised, how many customers you have, your industry, number of employees, location, claims history, and much more. When you’re just starting out and don’t have any employees or customers, you can expect to pay for very basic coverage starting at a few hundred dollars a year. However, as you grow, so will your risks and coverage needs, and you will likely be paying in the thousands.
You can get free quotes from our startup insurance experts at CoverWallet. Simply head to CoverStartups, and you can fill out an online application in a matter of minutes and connect with an insurance expert.
It is sometimes tricky to find the right insurance for a tech startup. Not all insurance companies can provide you with the best type of coverage, or even some packages that you, as a startup, will need. As you grow, it’s important to keep revising your insurance, making sure that it’s updated and that you will be covered against new risks that your startup might have to deal with. Always remember that even a single small mistake could lead to one big lawsuit, causing significant financial losses to your business.
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