As the owner of a tech or lean startup, you might think business insurance is a luxury to be considered at a later date. But, if your startup is dependent upon others to become profitable, needs a physical location, or carries unique risks, failing to obtain insurance can compromise the foundation of your company in the event of an incident. Tech startups, in particular, face a variety of risk management issues in addition to general liability, like cyber security and employment practices liability.
Understanding the Reality of Cyber Threats
According to EY’s 2014 Global Information Security Survey, an alarming 56 percent of organizations are unlikely to detect a cyber attack. That means more than half of all businesses – startups included – could be compromised without even knowing it. Other interesting bits of information from that same survey include the fact that 74 percent of businesses believe their cyber security only partially meets their needs, 42 percent don’t have a security operations center, and 37 percent lack real-time insight into attacks.
What’s the total cost of a cyber attack? Last year’s Global Report on the Cost of Cyber Crime suggests a major breach takes around 31 days – at a cost of $20,000 per day – to clean up and fix. In all, the total price for remediating a data breach hovers around $640,000 for large corporations. While you may think a cyber attack on your small startup couldn’t possibly cost very much, the report clearly suggests that smaller organizations have a higher per-capita cost than larger counterparts.
The Cost of Employee Lawsuits
Did you know that employee lawsuits have increased by approximately 400 percent over the past two decades? How about the fact that 41.5 percent of those lawsuits were brought against small businesses or startups with less than 100 employees? Average court costs, legal fees, and other expenses related to defending against employee lawsuits can range from $15,000 to $125,000, depending on whether the case is settled out of court or goes to trial. Could your startup afford these costs? You can never be careful enough and it’s critical that you protect your tech startup at all costs.
The Insurance Polices Your Tech Startup Needs
Every industry is different, and there are specific needs for different businesses. However, most tech startups will find it useful to protect their company with the following insurance polices.
- E&O liability + cyber/network liability. An errors and omissions policy (E&O) protects professional advice and defends against negligence claims made by clients. In essence, the policy covers you for costs related to alleged failure to perform and any financial loss caused by an error or omission in the product or service you sell. In many cases, you can add a cyber/network liability policy to an E&O policy to protect you against exposure of private data or information that leads to financial damage during a network breach or cyber attack. Depending on your resume, gross revenue, and other factors, premiums typically range between $2,000 and $5,000.
- Employment practices liability. Every tech startup with even a handful of employees needs employment practices liability. This form of insurance protects your business against potential discrimination, sexual harassment, wrongful termination, or failure to hire lawsuits. These policies are pretty affordable and premiums typically cost between $1,500 and $3,000.
- Workers’ compensation insurance. You can’t forget about workers’ compensation insurance. Depending on your payroll, a policy for a small startup typically ranges between $1,000 and $2,000. That’s a small price to pay for protection against workers’ comp claims and you can even purchase a policy for yourself and the other founders.
- Commercial general/commercial property liability insurance. A commercial general liability policy protects against property damage or bodily injury to a third party, while a commercial property policy protects against issues that occur within the office or on the business’ property (i.e. fire damage). The approximate cost is between $500 and $2,500.
- Key person insurance. Essentially a life insurance policy, key person insurance protects your business in the case that an essential employee or founder passes away. At only a few hundred dollars per year, this policy can help you ensure your business is adequately protected in the event of an unfortunate death.
- Directors liability insurance. For tech startups, it’s important to be as protected as possible. In the unfortunate instance that you cause data loss or some form of other damage to a client, you can be sued as director of the company. Directors liability insurance can rescue you if you’re personally sued. Annual premiums usually come in between $1,000 and $3,000.
How to Pick an Insurance Policy
There are plenty of choices to choose from when considering each of these different policies. The key is to determine which provides the highest return on investment. Typically, you’ll want to consider some of the following questions:
- Does the policy protect me both domestically and internationally? In 2015, it’s not uncommon for small businesses and startups to operate with domestic and international clients. It’s worth looking at whether a specific policy carries over to international issues or not.
- Is software covered under the general liability policy? According to Pedro Hernandez, “It’s not uncommon for software to be left out of general liability policies, and that can have a disastrous effect should something go wrong with your code.” It would benefit you to find the answer to this question prior to signing up for a specific policy.
- How accessible is the insurance provider? When you need your insurance provider, nothing is more frustrating than having to to get in touch with them. It may be worth spending a few extra dollars each month for a provider with a reputation of excellent customer service.
Business Insurance USA
At Business Insurance USA, we offer a comprehensive list of insurance products and services to help your organization effectively navigate every phase of business – from startup and expansion to growth and maturation. For additional information on our various policies and how they can be customized to meet the needs of your business, please contact us today. We would be happy to point you in the right direction and provide you a quote.