What Kinds of Business Insurance Do Startups Need?

Business insurance protects your startup from various risks, including legal liabilities, property damage and employee injuries. Even a minor incident could lead to significant financial loss without proper insurance, potentially jeopardizing your business's future.

For startups, the most common types of insurance include general liability insurance, property insurance and workers' compensation insurance. These cover basic risks that most businesses face, such as accidents, property damage and employee injuries. Additionally, depending on the nature of your business, you may need specialized coverage like professional liability insurance, cyber liability insurance or product liability insurance.

While often driven by innovative ideas and passion, startups face many potential risks that could threaten their growth and survival. To mitigate these risks and protect their assets, startups should consider investing in different types of business insurance. Determining which types of insurance you need starts with understanding the coverage type's purpose and assessing your specific needs.

While many types of insurance are highly recommended, some specific policies are legally required for startups, including:

• Employers' Liability Insurance: If you have employees, even freelancers and contractors, you are typically required to have employers' liability insurance. This policy covers medical costs and lost wages if an employee is injured or falls ill due to their work.
• Professional Indemnity Insurance: Required for businesses providing professional services, particularly for payment initiation service providers (PISPs) or account information service providers (AISPs) under PSD2 regulations.
• Public Liability Insurance: Though only sometimes legally required, it may be necessary if your clients or investors demand it. This insurance covers legal fees and damages if your business is sued for causing injury or property damage.

Be sure to familiarize yourself with the business insurance needed for your operation in your state, as requirements may differ depending on your location.

Without insurance, startups face significant financial exposure to common business risks such as property damage, legal liabilities and employee injuries. For instance, general liability insurance for startups covers legal fees and damages if your business is sued for injury or property damage, which could be devastating for a young company with limited resources.

Similarly, workers' compensation insurance covers medical expenses and lost wages for injured employees who become ill while working. Also, it helps startups comply with state laws that require such coverage, avoiding potential legal penalties.

Professional liability insurance, also known as errors and omissions (E&O) insurance, is vital for startups offering professional services. It provides coverage against negligence claims stemming from errors or performance failures that may cause harm.

In addition to the more common startup business insurance types, consider these other types of insurance for comprehensive coverage.

• Business Interruption Insurance: This insurance covers the loss of income a business suffers after a disaster. It helps a company get back on its feet by covering ongoing expenses and lost profits during periods when it cannot operate.
• Commercial Auto Insurance: Essential if your business owns a vehicle. It covers damage to your business vehicles and liability for any damage or injury they cause.
• Employment Practices Liability Insurance (EPLI): This provides coverage against employee claims alleging discrimination, wrongful termination, harassment and other employment-related issues.
• Equipment Breakdown Insurance: Covers the cost to repair or replace mechanical or electrical equipment that breaks down unexpectedly. It’s crucial for startups that rely heavily on specific equipment for their operations.
• Commercial Umbrella Insurance: This provides additional liability coverage beyond the limits of your general liability, auto liability and other liability policies. It helps protect your business against large, unexpected claims. -Business Owner's Policy (BOP): A BOP combines general liability and property insurance into one package. It’s typically more affordable than buying the coverages separately and is designed for small- to mid-sized businesses.

Depending on the business you're starting and the industry you're in, these coverages may be just as vital as other types of small business insurance.

The cost of business insurance is not a one-size-fits-all figure; it varies significantly based on several factors, including years in business, location and industry. Here are some of the different variables that can affect small business insurance costs for startups:

• Years in Business: Initial premiums may be higher for startups due to their lack of an established track record, but maintaining a clean claims record over time could help reduce costs. Established businesses are often seen as less risky, leading to lower premiums.
• Business Size and Revenue: Larger businesses with higher revenues may have to pay more for insurance as they have more to lose in the event of a claim.
• Industry: Businesses operating in industries perceived as high-risk, such as manufacturing or construction, may face higher insurance premiums due to the increased likelihood of workplace accidents or damages.
• Location: A business's geographical location can influence insurance costs. For instance, a company in an area prone to natural disasters may have higher property insurance premiums.
• Number of Employees: More employees often mean higher costs for insurance policies like workers' compensation, as there is a greater potential for workplace injuries or illnesses.
• Coverage Limits and Deductibles: Higher coverage limits and lower deductibles typically lead to higher premiums, as the insurance company may have to pay out more in case of a claim.
• Type of Insurance: Different types of insurance have varying costs. Depending on the nature of the business, general liability insurance may be less expensive than professional liability insurance.

The average monthly cost of general liability insurance for a sole proprietor in the software development industry with no employees is $28. This type of insurance covers legal fees and damages if the business is sued.

On the other hand, the average monthly cost of workers' compensation insurance — which covers medical expenses and lost wages if an employee gets injured or sick on the job — for a software development business with five employees is $68. These examples underscore the importance of understanding your startup's specific insurance needs and associated costs.

Getting business insurance is a crucial step in protecting a startup from potential risks and liabilities. There are several ways and places to secure insurance:

• Insurance Brokers and Agents: These professionals can help startups understand their insurance needs and find the best policies for their specific circumstances. Brokers work with multiple insurance companies and can provide a variety of options, while agents typically represent a single insurance company.
• Online Insurance Providers: Many insurance companies offer online platforms where businesses can get quotes, purchase policies and manage their coverage. This can be a convenient option for startups, especially those with straightforward insurance needs.
• State-Run Insurance Programs: In some states, businesses can get certain types of insurance, like workers' compensation, through state-run programs.

Consulting insurance professionals and resources can help you find the best insurance for your startup that meets legal requirements and provides adequate financial protection for your business.