4 Key Startup Insurance Policies you should be thinking about.
Running a business is risky. While some calculated risks are within your control, many are just out there, lurking. Part of a CFO's job is managing risk. Not all risks can be mitigated but fortunately, with the correct insurance, you can limit unnecessary exposure to the business. Here are four insurance policies to consider for your business.
Directors and Officers Insurance
What is it for?
Directors and officers (D&O) liability insurance protects the personal assets of corporate directors and officers in the event they are personally sued by employees, vendors, competitors, investors, customers, or other parties, for actual or alleged wrongful acts in managing a company.
The insurance, which usually protects the company as well, covers legal fees, settlements, and other costs. D&O insurance is the financial backing for a standard indemnification provision, which holds officers harmless for losses due to their role in the company.
D&O insurance is usually purchased by the company itself, even when it is for the sole benefit of directors and officers. Reasons for doing so are many, but commonly would assist a company in attracting and retaining directors. Directors are typically not managing the day-to-day operations of the organization and therefore cannot ensure that the organization will be successful; further, business is inherently risky.
Not surprising, ever the contrarian, Warren Buffett, does not purchase D&O insurance for its directors, unlike most similar companies. Warren Buffett believes that the directors should face consequences of their mistakes the way that other shareholders do.
What does it cover?
Directors' and Officers' (and Spouses') Personal Assets
Expenses Related to Covered Claims, Including Legal Expenses
Most Cover the liabilities of the Organization
What doesn’t it cover?
Poor operating performance or lost revenue from damage to the business itself, such as lost sales/revenue
The fraud, dishonesty, and criminal acts of the directors and officers
Certain kinds of employee lawsuits, such as for an injury suffered on the job
Direct losses related to data breaches, ransomware or other types of cyber losses
Claims that should be covered by other policies (such as property damage)
Tech Errors & Ommissions
Tech E&O insurance is a specialized insurance product that was created to protect the specific professional liability risks that people operating in the technology industry commonly face.
Some examples of industries and businesses that tech E&O insurance is most beneficial for:
Software developers, including mobile and web developers
Businesses that manufacture electronic hardware
What does it cover?
Tech E&O insurance will cover risks that are related to the financial loss of a third party arising from your company’s product or service’s failure to perform as it was expected or meant to perform.
Here are a few examples of the types of liability claims that are often filed against tech startups. For more, read our full article on common tech E&O claims.
- Contractual Liability
If your company signed a contract promising a feature, service, or product to be completed and delivered by a certain date and your company was unable to do so, leading the financial losses suffered by your client as a result, you could be sued for contractual liability.
- Professional Negligence
Products that tech companies create can easily cause problems for a large number of customers and users if a mistake was released into production.
For example, if your tech company creates software that damages your client’s computer in some way when it’s installed, a claim can be filed against your tech company for professional negligence.
What’s Not Covered?
As is the case with most types of insurance, there are certain exclusions that a tech E&O policy usually will not cover.
Most notably, professional liability will not cover claims that are the direct result of you or your employees engaging in criminal activity or illegal acts.
Financial insolvency is also not covered by a tech E&O policy.
Also, most professional liability policies will not cover copyright infringement or libel claims either. If you need this coverage, you should add intellectual property insurance to your company’s tech E&O coverage.
What Is It?
A cyber insurance policy, also referred to as “cyber risk insurance” or “cyber liability insurance” coverage, is a financial product that enables businesses to transfer the costs involved with recovery from a cyber-related security breach or similar events.
Typically, the most important aspect of cyber insurance will be network security coverage. This coverage will respond in the event of a network security failure – such as data breaches, malware, ransomware attacks and business account, and email compromises. However, the policy will also respond to liability claims and ancillary expenses of an attack or breach.
What does it cover?
Cyber insurance is as dynamic as the companies it protects and is consequently far from standardized. However, some of the issues that cyber liability insurance typically covers include:
Data loss, recovery, and recreation
Business interruption/ loss of revenue due to a breach
Loss of transferred funds
What’s Not Covered?
Like most coverages, there are certain exclusions that a cyber policy usually will not cover.
The policy will not respond if you are sued for any potential vulnerabilities in your systems before a breach occurs.
Most notably, cyber insurance policies will typically not reimburse you for future profits lost due to a cyber-attack or data breach.
Key Person Insurance
What is it for?
Key person insurance is purchased by a business to insure the life of one of the company’s most vital employees. It’s intended to help the company recover from the loss of a key contributor whose death or disability would reduce the company’s value or operational capabilities.
Employees that are typically covered include high-level executives and other decision-makers, employees who are highly visible, top salespeople, and employees with unique knowledge or skill sets.
Basic Eligibility Requirements To Buy Key Man Insurance
The key person policy must be a term insurance policy (limited to a specific period).
The key person being insured needs to own less than 51% of the company’s shares, and the total number of shares held by the key person and their family must be less than 70% of total shares.
The company will have to submit proof that the insured person is indeed crucial to its operations.
Why Do you need it?
Key person insurance will ensure that your company is financially protected from the fallout of a key person’s death, so you can recover and move forward. Your company will be better able to cover hiring or training a replacement. You can also make up for loss of profits or any debt that you may incur while the company is recovering.
Key person insurance is necessary even if your business plans to shut its doors after the loss of a key person; the money can be used to cover the closing costs, pay off investors, and provide severance packages for employees.
The Summit Group's Fractional CFO platform ensures a risk analysis for founders, investors, and employees.
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