Getting Our First Insurance Policy
We work hard to start a company. No matter how hard we try, or how good we are, bad things can happen. Unexpected things. We share the responsibility for those things by getting an insurance policy.
It’s never too early to get insurance for the business. Even if incorporated as an LLC there are limits to the protection. Even if not charging for products, we can still be liable for damages occurred in their use. The answer for this is usually errors and omissions insurance. E&O insurance, as we end up calling it to shorten things is a liability insurance that protects the company and the people that work at the company against lawsuits over negligence or other liability claims.
Like most for-profit companies, insurance companies need to make a profit. To do so, they protect us financially against a known set of possible things that can happen. Some are bundled into a standard policy; others cost extra. They track variables that help them determine the likelihood. Sometimes those algorithms are dated but often they help us to uncover ways to make the organization better - if only to get a cheaper rate on our policy.
The policy is an agreement that we will act in a certain way and if something bad happens and we get sued (or there's a claim against the policy), the insurance company will help, or completely cover, the damages.
Selecting a policy isn’t always a simple task. Most business owners won’t understand a tenth of the words in a policy. After all, we aren't typically insurance agents. Selecting the right type of policy can be complicated, and selecting how much we spend to extend coverages in different areas might be difficult. But we need the essential safety net that insurance provides so we have to get started somewhere.
We also have a responsibility to be efficient with how we deploy the limited funds in any startup. Our personal needs might be different from those of the company. Some organizations will sell products and have offices and so need more than E&O insurance and need general liability insurance with certain wavers based on the state and city.
Every business needs insurance. If it’s the first time, the hardest part is to just pick up the phone or go to a web page and fill out a form. From there, it gets pretty simple because there’s someone that has a quota on the other end and they’ll be calling us to sell us a policy. So let’s go through a few things to consider:
Write an End-User License Agreement (EULA). There’s an important aspect of the EULA (or EUSLA for specialized software license agreements) which is a cap on damages. The cap should be less than the mount of insurance being purchased. Some industries or sizes of companies have standard caps required for damages and so this will be different for various types of companies.
Talk to at least three agents before buying a policy. The old maxim is “shop around” but a couple of different things happen when we talk to multiple agents. We get better pricing, which is never a terrible idea with limited funds. And we get educated on the industry and what we need. We also get more opportunities to find someone we can trust for the next decade.
It’s not just about money. Try to find a broker that immediately builds trust. Especially due to all the complexities that are entailed with insurance, lack of expertise in most business owners means we have to trust the broker. They should build trust by being knowledgeable and, well, by being trustworthy.
Ask how the agency calculates their quotes. We should shop around for different insurance agencies in order to get the best quote. But remember to make sure that they are transparent throughout the process. For example, don’t forget to take into account the size of the company, amount covered, and the industry. Knowing all the facts and figures about how the agency assesses the business will allow us to stay more informed. If one policy is cheaper than another, ask why. They should already know the policy is being shopped around and so this should come as no surprise.
Choose a plan that scales. When trying to buy company insurance, see if the quoted prices work as the business scales. Some specific insurance agencies have per-employee costs, making the overall scaling process more and more difficult. Or to sign a deal with a new customer we may need a $2M policy or to add a feature that we didn’t have before, so understanding what we’ll have to do and what it will cost is important. It’s a great problem to have, provided we’re charging large customers enough to fund the policy changes. Planning for overall growth is helpful in all areas of a business, so researching for insurance is no different.
Look beyond General Liability Insurance to cover a number of different aspects of the business potentially not otherwise covered. It is important to read all the insurance-related documents and contracts in as much detail as possible in order to get an understanding of what is covered and what is not. Usually, small businesses start out with general liability insurance while doing their own analysis in order to find out what they need to get additional insurance.
Believe it or not, there are some great side effects to getting E&O insurance. To get a policy, we’ll have to fill out some paperwork. That paperwork will see us checking boxes for things we have in place and the policy gets more expensive the less of those we have. Therefore, if we add certain security protections that we probably already knew we needed, our policy gets cheaper. Checking some of those boxes can take our focus away from building features that inspire customers, but at least we aren’t building software that’s dangerous for our customers to use.
While looking for insurance, remember that a single policy might provide comprehensive general liability coverage and even separate coverage for property damage owned by the insured. Getting hold of the correct insurance type and amount of business insurance is a key layer of protection that should never be avoided. The lessons we learn about protecting the company while acquiring and renewing insurance are critical to protecting ourselves as we blossom into an amazing company.