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Business Insurance Guidelines for Start Ups

As a start up business owner, you know how hectic and exciting the early stages of building a new company can be. With all of the other time consuming tasks on your plate, you may not have factored in securing insurance.  Many emerging entrepreneurs are uncertain about what kind of protection is suitable for their particular business or even about if and when they need it at all.

The fact is that there is more litigation directed against private companies now than ever before.  Having insurance will help you better cope with the possible road bumps ahead. If your product harms someone (e.g. E&O/Product Liability), or if your product damages someone’s property (Commercial Package: Property), and even in the unfortunate event of bankruptcy, you can set up the right insurance to respond (e.g. Directors & Officers Liability Insurance). With the appropriate coverage in place early on, you will benefit from added security, lower premiums and an additional forward-thinking measure to help you successfully move beyond the start-up phase.  Navigating through the elaborate world of insurance can be a daunting task for both the emerging entrepreneur and the seasoned business owner; I’d like to help get you started.

The Start-Up Phase
During the start-up phase you’re quite busy to say the least. It is common for companies to purchase their first insurance due to mandatory stipulations in a lease or contract however, there are other types of protection that could impact your business. Consider these types of insurance coverage as your company enters its first major phase of development:

  1. Workers’ Compensation: Have you hired employees?
  2. Commercial Package Policy: Are you leasing space or equipment?
  3. Umbrella Liability: Do you need higher limits?
  4. Professional Liability: Do you provide service for a fee?
  5. Employee Benefits: Do you want to attract and retain employees?
  6. Management Liability: Do you have investors?

1.      Workers’ Compensation
Worker’s Compensation is mandatory once you hire your first employee.

    • Cost Estimate: Cost is based upon on total payroll and job duties of your employees, but typically isn’t more than $3,000 if you have under 5 employees.
    • Covers: Medical costs and income replacement for employees injured while on the job. Employer’s Liability: Defense of a company against suits brought by employee(s) for a company’s negligence, i.e. unsafe working conditions.

2.      Commercial Package Policy
This is the core of your risk management program and will satisfy a handful of requirements by a landlord (for your new lease), your customer who requires evidence of liability, and anyone leasing you equipment.  Contains two or more lines of coverage usually property and general liability (and sometimes auto and umbrella).

    • Cost Estimate: For small companies, cost is often less than $2,500.
    • Covers: Property, Business Interruption/Extra Expenses (can be modified to cover continuing expenses, and milestone payments), Employee Theft, General Liability, Products Liability, Basic Automobile Liability and Employee Benefits Liability.

3.      Umbrella Liability
Your landlord may require limits higher than what is provided through your general liability policy and this is a simple way to add limits to the existing coverage.

    • Cost Estimate: For small companies, cost is often about $1,000 per $1M of Umbrella limit.
    • Covers: Umbrella Liability expands the limits of the Commercial Package Policy: Auto, General Liability, Employee Benefits Liability, and Employers Liability.

4.      Professional Liability (a.k.a. Errors and Omissions/E&O)
If you provide service(s) to others for a fee then you likely have professional liability exposure.  Additionally, lawsuits can be brought against you even if you didn’t do anything wrong.  Generally companies consider this as a reaction to a contractual requirement.

    • Cost Estimate: Type of coverage varies greatly based on your occupation but costs can be less than $2,000.
    • Covers: Protect your business from customer lawsuits related to “negligence” or “failure to perform.”  Defense and litigation costs related to errors, omissions or negligent acts from your service or products that cause financial loss to your client. Allegations may include: Error, omission, or negligence in providing a service; Failure to provide a service, Violation of good faith, Overpromising, Improper documentation, Malpractice, Mismanagement, Misrepresentation of facts, Nondisclosure, and/or Violations of state and federal law.

5.      Employee Benefits
The more robust your offering the more attractive your company will be to existing and potential employees.

    • Cost Estimate: Cost depends on the specific offering you develop.
    • Covers: Basic employee benefits such as medical, life, vision and dental.  Employers with 10+ employees can also consider disability and 401k

6.      Management Liability
This is often required by investors to protect your business and personal assets as an officer or director of the company from fiduciary/monetary allegations by outside investors, suppliers or other counterparties.

    • Cost Estimate: Costs begin around $2,500 to $15,000 based on level of coverage.
    • Covers: Directors & Officers Liability/D&O, Employment Practices Liability/EPL (Discrimination, Harassment, etc), Fiduciary Liability (401K plan lawsuits).

I know that in the exciting early stages of building a new business there are already a lot of things to think about. While you’re finding investors, developing your product, and designing a web site, consider this friendly reminder to procure business insurance early. If things get bad, having the right insurance can protect all your hard work. Having foresight will help avoid, or better cope with, some of the obstacles that can get in the way of your success.

BizInsure Guest Blogger: Scott Eberhard

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