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  • Writer's pictureFreddie Servin

Navigating Insurance for California Small Business Start-ups - Overview

Updated: Apr 3, 2019

Starting a business from scratch can require a huge investment of time and effort. You may start with market research. That process allows you to determine if there is a market for your product. How many clients will buy your product, and what are they willing to pay for it?

If your market research reveals a strong need for your product or service, the next step is to create a business plan. Your plan may be 50 pages long or more. Your plan will document the market for your product or service, how you will deliver the product or service to clients, and what you’ll charge.

The business plan will include assumptions about the assets you need to run your company. Most owners will obtain property insurance to protect company assets from damage of theft. Those assets may include buildings, equipment or vehicles.

Many business owners use the business plan to find investors. A potential investor may ask you if your company has business income insurance. This policy can provide income if your company suffers losses due to a shut down or if operations have to be reduced on a short-term basis. An investor may also want to know if you have a general liability policy in place. These policies can protect your firm against customers or workers who believe they have been injured at your workplace.

You may find that potential investors want assurances that you have several types of insurance coverage in place before they will invest.

Once you’re up and running, your clients may rely on your advice and expertise. This is particularly true of service-related businesses, such as law, medicine or accounting. You may have a need for professional liability insurance. This policy can protect your firm, should a customer pursue litigation against you after relying on your advice.

As you grow your start-up business, you may need to hire employees. Adding workers allows you to delegate tasks, so you can focus on growing your business. Many businesses obtain employer practices liability insurance. This policy can protect you against legal actions by workers. These might include wrongful termination,

discrimination or harassment.

Insurance Products for New Business…

Here’s a breakdown of the seven main types of business insurance startups need, when you need them, how much to get, how much it will cost you and how to get them. This isn’t an exhaustive list of every kind of insurance available, but it covers the scenarios that most startups will face at some point in the life of their business.

1. General Liability Insurance 2. Worker’s Compensation Insurance / Disability Insurance 3. Errors and Omissions Insurance 4. Cyber Liability Insurance 5. Key Person Insurance 6. Employment Practices Liability Insurance 7. Directors and Officers Insurance

General Liability Insurance: When a helpless child chokes your candy in your office

General liability insurance is what most founders think of as “slip and fall” insurance, but it actually goes way beyond the simple office mishap.

General liability insurance covers all kinds of bodily injury and property damage caused by your company and includes the actions of your team members outside of the office as well as the use of your products by your customers.

Claim examples…

Your sales rep spills coffee on a client when meeting at a coffee shop, causing severe burns.A child chokes on the candy you’ve offered to them.

A competitor sues for defamation, libel, or even copyright infringement based on the content of your website or your advertising campaign.

You’ll need this when you…

  • Start your company. Policies are usually inexpensive for startups (as low as $500 annually) so there’s no excuse for not having a general liability policy in place.

  • Sign a lease on new office space (it’ll be required by your landlord).

  • Sign basically any other contract with vendors, distributors and retailers. This tends to be a boilerplate contract requirement, so keep an eye out for insurance terms.

How much you need…

$1M per occurrence and $2M aggregate is the standard starting point for any startup.

Some landlords and partners may want this limit bumped up to $2/4M respectively or will request that an “umbrella policy” go on top of the underlying $1/2M, but that varies by lease.

Approximate pricing: $500-2,000 per year

Worker’s Compensation Insurance / Disability Insurance: When your startup's foosball table stops being fun and starts being Hunger Games

Worker’s Comp covers injuries to your own employees while on the job. Similarly, disability provides a source of income to injured employees when they aren’t able to perform their job.

Claim examples…

  • Employees injuring themselves on the job, whether at the job or not. Think slips, falls, and spills.

  • An employee suffers from carpal tunnel from all the data entry he or she is entering.

You’ll need this when you…

Have employees on payroll, simply stated it the law in California require coverage to protect the welfare of your team.

How much you need…

The statutory minimums in California is 1M/1M/1M, and as long as you hit those minimums, you’re all set. However, some carriers offer benefits that are more robust and encompassing than the standard insurance minimums.

Approximate pricing: $300-500 per salaried employee per year

Errors and Omissions Insurance: When that line of code burns everything to the ground

Errors and Omissions Insurance (E&O) covers claims against you and your company for problems with your product/service that cause a financial loss. The problem can be professional (doctor’s malpractice) or technical (newly deployed code causing errors).

This is one of the most important insurance policies for tech startups, particularly in the B2B SaaS space. The average contract tends to be large, and a bad deploy can affect tons of users at the same time, causing the damage claims to pile up.

Claim examples…

  • An actual bug in your SaaS marketing/sales platform that causes users to lose money—payments aren’t processed, leads aren’t recorded, etc.—that leads to a class action lawsuit.

  • Your product/service doesn’t live up to your customer’s expectations; the customer alleges you haven’t honored company policies or contractual obligations.

  • Your customer claims you’ve violated the terms of the user agreement and sues for misrepresentation or violation of contract. Even if the allegation is borderline frivolous, you’ll still have to pay a lawyer to deal with it. These costs are covered by E&O policies.

You’ll need this when you…

  • Launch your product and get customers. Once your product is out in the wild, you’re exposed.

  • Sign a contract with customers, particularly if in the B2B space or dealing with any large corporate vendors.

How much you need…

$1M is a good starting point for E&O if you’re just launching your product. It will also be the minimum you’ll see on a contract requirement. When revenues exceed $3-5M, additional coverage should be considered.

Approximate pricing: $1,500-4,000 per year

Cyber Liability Insurance: When you leave your laptop with your customer database at that fancy noodle place

Cyber liability insurance lessons the costs from data breach incidents and the loss or theft of third party data. Losses covered can include lawsuits, forensic costs, data restoration costs, breach notification costs (this is a big one), regulatory costs, and more.

Cyber policies often include “business interruption insurance” as well. This a significant piece of coverage because it covers the company’s expenses (and the lost profits, in some situations) if your company needs to temporarily prohibit access to the product after a data breach.

Claim examples…

  • Your AWS databases are hacked and your users sue you for leaking information.

  • An employee leaves a laptop or phone in a cab that’s picked up by someone who leaks private user data.

  • You suspect there may have been a breach and you have to notify your users to comply with individual state laws regarding breach notification procedures.

  • You’re hit with a DDoS attack and you have to shut down your site for a few days, causing lost profits and expenses to build up.

You’ll need this when you…

Collect user data. The data can be as basic as a name & email address. Laws vary from state to state, but this can be enough to qualify as “personally identifiable information” (“PII”), which you can be held liable for if disclosed accidentally or maliciously.

How much you need…

E&O and Cyber will usually be paired together, so the same limits will apply until some serious growth in revenues and user base occurs.

Approximate pricing: $1,500-4,000 per year (included with the cost of E&O)

Key Person Insurance: When you are a key person & you die

Key Person Insurance (or “Key Man Insurance”) is a life insurance policy that pays out to the company rather than family upon insured person’s death or incapacitation.

Unlike other policies, a key person insurance policy will pay out in a lump sum once after a situation triggers coverage. This is to compensate for the hefty expenses startups incur when searching for a replacement and continuing to operate in the interim.

Claim examples…

  • Death or permanent incapacitation of the insured person. There are typically exclusions around alcohol/drug abuse and suicide.

You’ll need this when you…

  • Close a round of institutional funding. Many series A and some seed investors will require Key Person insurance.

  • Know that your valuation is driven by your founding team and the ability to succeed lies with that essential lineup of teammates.

How much you need…

$1M is a baseline policy, but you can go lower or higher based on the amount raised and skill set of the key person. Similar to D&O, companies that have raised $8-10M+ usually get $2M in coverage per key person.

Approximate pricing: Varies widely by product, carrier, and health/age of the key person

Employment Practices Liability Insurance: When you terminate people for no reason other than you don't like them

Employment Practices Liability Insurance (EPLI) covers claims when it comes to Human Resources within a company: hiring, firing, disciplinary action, and more.

Claim examples…

  • Lawsuits for violating employment laws around race/gender/age discrimination and/or discriminatory hiring/firing practices.

  • Sexual harassment or hostile work environment lawsuits.

  • Wrongful termination lawsuits.

You’ll need this when you…

Hire! If you’re ramping up hiring, you should have EPLI in place. It’s always important, but

EPLI is essential as you cross the 10 employee threshold as that is when the company becomes subject to various federal employment laws. The risk exposure increases substantially at this point.

How much you need…

The average EPL claim comes in at about $400-500K and one of the most heavily hit demographics is made up of companies with <100 employees. It's recommend to start at $1M, but if you can swing $2M, you'll likely be better off.

Approximate pricing: $3,000-8,000 per year

Directors and Officers Insurance: When that board member goes Minority Report on everyone and tries to undermine the whole operation

Directors and Officers Insurance (D&O) insurance covers lawsuits against, wait for it,

Directors or Officers of the company related to the actions taken on behalf of the company in their capacity as, you guessed it, Directors and Officers.

Claim examples…

  • A board member or shareholder bringing a derivative suit against the execs when they feel they’ve violated their fiduciary duties.

  • Alleged misrepresentations in offering documents / prospectus.

  • Regulatory action against the directors and officers for securities-related issues like reporting errors, failure to file Reg D forms, etc.

You’ll need this when you…

  • Close a round of institutional funding. Most investors will require D&O insurance.

  • Actively fill board seats. D&O can actually attract board members because it shields Director(s) when they make decisions on behalf of the company.

  • Operate in a heavily regulated industry. Federal and state regulatory agencies have a tendency to name Directors & Officers personally when sanctioning companies.

How much you need…

$1M is a standard starting point for D&O coverage. Once you raise a round of $8M+, it’s time to think about moving up to $2M+ limits.

Approximate pricing: $5,000-10,000 per year

When to get the insurance you need:

There are essentially five major events that should prompt you to look in to business insurance.

1. Moving into a new office 2. Hiring employees 3. Signing clients 4. Closing a round of funding 5. Your business experiences rapid growth.

Colony Insurance Solutions - A Team of Advisers To maintain focus on your start-up business, you can retain a team of outside experts to help you with certain tasks. That team may include an attorney, accountant and an insurance professional.

Colony Insurance Solutions can apply years of business insurance experience to your unique situation. We can tailor a set of insurance solutions that fit your needs. Call 858-771-9590 to find out more about your insurance needs or Start A Quote In Seconds

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