By the time Leo Welder launched online startup guide ChooseWhat.com in 2008, he'd purchased a handful of general insurance policies but skipped the intellectual-property litigation insurance. "We weren't filing any patents or selling any specific technology, so it didn't seem important at the time," the Austin-based entrepreneur says. By the end of the year, however, he found himself embroiled in a trademark lawsuit with J2 Global, a publicly traded company in Los Angeles, over use of the term efax.
In the end, the companies reached a settlement and ChooseWhat survived--but not before Welder had spent several hundred thousand dollars funding his own defense. So he soon purchased an errors and omissions policy to protect his company from trademark issues. "The policy is expensive, but nowhere near an IP attorney's fees, which can be $600 an hour or more," he says. "It's not just a matter of 'Can I afford this?' but a question of 'Can I afford not to have this?' "
No matter how savvy you are, you can find yourself in legal and financial quicksand if life throws a curveball (or patent lawsuit) your way. Yet many startups put off getting the proper insurance, in an effort to save a few bucks or because of simple oversight.
As Lou Cannataro, partner at wealth-management firm Cannataro Park Avenue Financial in New York City, says, "The real trouble usually doesn't come from the coverage you have," but rather from gaps in that coverage. Here, entrepreneurs and insurance pros share their tips to avoid getting burned--or put out of business.
Cover (all!) your bases.
Insurance agents and financial planners agree on one blanket rule: At the very least, a business needs general liability insurance. That can protect you from costs associated with a wide swath of ills, from customers' bodily injuries to libel. The average general liability policy is one of the least expensive types of coverage, according to Chicago policy provider Insureon. For a low-risk business, on average, coverage with a $1 million ceiling will set you back $425 annually.
Welder admits that wanting to keep prices low curbed some conversations with his agent.
So make sure to have in-depth discussions, and ask about the additions or amendments--called riders and endorsements, respectively--that get you to the right level of coverage. If you and your workers drive company vehicles on the job, for instance, commercial auto insurance is a must. If you're in professional services, look into errors and omissions insurance, which protects against a negligence claim, says Maxime Rieman, a marketing director at New York City-based online business insurance
Embrace being the little guy.
As a small-business owner, your fear of catastrophic accidents, damage, and lawsuits is matched only by your fear of spiraling expenses. And insurance will cost you: Since 2014,
the average price of a small-business insurance policy has climbed more than 75 percent, to $1,281, according to Insureon.
Still, what you'll pay depends on your circumstances. If you run a low-risk business (such as copywriting or consulting, as opposed to construction) and are just starting your company, take a look at a business owner's policy, which can combine some or all of these policies into one low-cost package. Eligibility is typically limited to businesses with fewer than 100 employees and less than $5 million in annual sales.
"These policies are specifically designed for startups and smaller organizations," says Corey Bray, founder and CEO of LegalNature, an L.A. firm that provides companies with
legal documents. "They help limit the exposure of the business to litigation, and minimize a small-business owner's personal liability--which is the most important consideration."
Find the right agent.
Karen Moran realized she had an insurance problem in 2015, when she found a sheriff's deputy about to remove the license plates from the vintage caravan trailer out of which she operates her food business in Charleston, South Carolina. Turns out, when she had previously switched carriers, her new agent had never sent the required paperwork to the state. "The state thought we had no auto insurance and suspended our plates--and it had been like this for six months," says Moran, the founder of Sweet Lulu's Bakery & Cocktail Caravan. "We never knew."
Moran wishes she'd spent more time getting recommendations from her business network before signing up with an agent. Rieman says it makes sense to also seek recs from founders in similar industries, who might know all-star agents well-versed
in the challenges your company could face.
Recalibrate as needed.
Your business isn't set in stone, so don't expect your insurance needs to be calcified either. Larry Patterson, the owner of a North Texas franchise of home- and auto-glass-repair company Glass Doctor, found out a few years ago that an employee had embezzled
at least $12,000 by skimming small amounts off invoices--"not an amount that would have put us out of business, but a good bit of money," Patterson says. Fortunately, his commercial property insurance policy provided $10,000 for employee theft. After
he received the check, Patterson promptly went out and bought a $100,000 standalone
employee crime policy, which costs him about $1,000 a year.
"It's absolutely worth it, because it enables me to give my employees more autonomy without being overly worried," Patterson says. "It also discourages theft, because employees know we have it and know that I have to file criminal charges to collect the money."
In the end, "your personality will definitely shape your decisions," says Joel Ohman,
a certified financial planner in Tampa who founded InsuranceProviders.com. "It's important to know yourself and whether you'll be a better leader if you're not stressed about coverage, or if you have a high risk tolerance and will get more stressed thinking that you overpaid."
We need what?!
Insurance isn't a one-size-fits-all endeavor. Many startups overlook the coverage they need for their specific situations.
For employees on the road.
Commercial auto insurance protects your company vehicles--but if employees are using their personal wheels while on the clock, you'll want non-owned auto liability to protect the company in case one of them has inadequate coverage for an accident.
For star players.
Banks and private equity firms often require term life insurance for founders before extending loans or investments. Some also require so-called key person coverage. "Ask yourself, 'Are we dependent on a single person, and if they were hit by a bus, would it ruin our business?' " says Tampa-based financial planner Joel Ohman.
Social security numbers, birthdays, driver's license info--if your company stores sensitive customer data, think about cyber risk insurance. This kind of commercial liability coverage is growing at an annual rate of 30 percent, according to e-business risk-management firm InsureTrust.
For trade-show booths.
Is your calendar crowded with convention appearances? You may need trade-show-specific liability insurance, which will cover you if an employee, a volunteer, or a visitor to your booth is injured in the convention hall.