INSURANCE CONSIDERATIONS FOR OWNERS OF STARTUP COMPANIES
November 29, 2012
By David Holmes
David Holmes is a Client Executive at TriSure, an independent commercial insurance brokerage based in Raleigh, North Carolina.
While working for one of the largest privately-owned commercial insurance brokerages in North Carolina, I’ve had the privilege of working with hundreds of businesses of all shapes and sizes, across multiple industry sectors. During my time at TriSure, I’ve worked with many startup companies, advising entrepreneurs and executive teams on areas of liability that demand appropriate risk management and insurance coverage to ensure that their businesses succeed.
We focus on a host of areas for companies just opening their doors to the public for product sales and providing service, commercial lines of insurance that include property and casualty policies, coverage for general and specific liabilities, and employee-related coverage that includes worker’s compensation.
Prior to joining TriSure, I owned my own company for several years. Since becoming an insurance and risk management professional I have seen many things that let me know now that I myself went under-insured and thus overexposed to many potential liabilities. For this Forrest Firm blog article, I thought I’d share some key areas where leaders at young companies would do well to pay some heightened attention and invest in their own security for future growth, protected from many of the catastrophic events that could take them under in one fell swoop.
Insurance isn’t always top of mind—in fact, it rarely is—for entrepreneurs who are just getting their business rolling and bringing in those first streams of revenue. Sometimes, it’s just a lack of priorities driving the de-prioritizing of risk management and obtaining proper insurance coverage, but all too often, it’s a product of an “I’ll just wait, because I can afford it later” mentality.
Choosing to go without insurance to cover your potential liabilities is a gamble. It’s a gamble that some win, but for those who lose, all too often it’s the end of their game entirely. When we provide risk analysis to our clients, we work back from the types of worst-case scenarios that we and they can both agree can be catastrophic to the health of their business. In turn, risk management and insurance professionals can tailor programs to meet the risk thresholds that, in turn, can make a company whole again, or come very close to doing so, when these events occur.
Let’s take a look at five key areas for startup businesses to consider as they get rolling along, bringing in money to their new companies.
Liability Coverage—Products and Services
Simply put, you need to have liability coverage for whatever it is you do. If you sell a product, even if you don’t make it yourself, you can often assume many of the liabilities associated with that product. Many companies that import products from overseas are often surprised when we tell them that, for all legal intents and purposes, they assume the liabilities here in North Carolina and the United States for those products.
Whether it’s a product you sell or a service you provide, it’s best to meet with a trusted advisor prior to opening the doors of your business to determine the potential liabilities you’ll face in its manufacturing, distribution, sale, delivery, and performance to and for your customers. Then, you’ll need a policy geared to the appropriate amount of coverage to match this potential exposure that comes from the normal course of executing your business.
Employee Coverage—Worker’s Compensation
Worker’s compensation insurance—get it in place if you have employees. Right now, many of you are seeing media coverage here in North Carolina on this topic, as regulatory entities are struggling with the fact that a large number of multi-employee companies have been doing business in our state without meeting statutory requirements for worker’s comp coverage.
Here are the facts: you’re mandated by law, once you reach a threshold of three employees, to apply appropriate worker’s comp insurance coverage. But even with less than three employees, you’re still taking a huge gamble with the health and wellbeing of both your company and its employees at stake. Even if you don’t fall under statutory requirements, you should still implement these policies to be able to protect your people if they are injured on the job.
Since you don’t have to have insurance to obtain a business license or incorporate your company with the Secretary of State, many companies tend to wait till they get more revenue to put in place—this is a slippery slope. This often proves a foolish choice, fatal for the business and hurtful to the employee, and it’s only a matter of time before it bites you back in a big way.
Many young companies mistakenly think that property coverage only applies when you own real estate. However, even if you lease, about nine times out of ten landlords will require you to show a certificate of insurance on property. They require, at a minimum, coverage on things like slips and falls on the premises, in addition to variety of other issues of liability.
Failure to cover your inventory, or in the case of a service provider, items such as computer servers, can be catastrophic for a young company. This type of insurance is relatively inexpensive, when compared to other types, so it’s an even more foolish gamble to endeavor for the startup executive.
Auto Liability—Hired or Non-owned Auto Use
Covering people as they go about company business in their personal automobiles is something that entrepreneurs rarely think about prior to meeting with me. Auto liability coverage provides insurance when people are going about the company’s business, whether they use a company vehicle or not. And whether they are in a company-owned or personally-owned vehicle, there are still liability issues that can be deadly to a business.
Hired or non-owned auto liability can occur with something as simple as an employee leaving the office to get supplies or deliver some work to a customer. If they have a serious accident, and the other part involves an attorney, companies can quickly find themselves named in a suit alongside the driver. That’s textbook exposure, and this exposure can lead to very severe, expensive judgments against the company.
Bringing It All Together—The Umbrella Policy
Due to the nature of our tort system, many attorneys and their clients eagerly file suits in liability situations. This can pose multiple problems, even for companies with adequate stand-alone policies in areas such as auto liability or product liability.
Let’s say you have coverage for up to $1 million in damages on your general liability policy concerning the products you make and sell (this is a routine number for many general and auto policies with regard to liability). In a heated legal environment, a million bucks just doesn’t go as far as it used to in remedying a settlement. We recommend that you bring an umbrella—an umbrella policy—just for these sorts of rainy days. Umbrellas sit atop and astride your other policies, offering an additional layer of coverage to supplement the limits of your area-specific coverage.
How big should your umbrella be? There are ways to benchmark appropriate levels for your umbrella coverage, based on appropriate coverage levels in the marketplace for companies of similar size and complexity to yours in your same or in at least a similar industry.
Summary—It’s About Making You Whole, so Look for Appropriate Coverage and Trust over Price
Again, the entire idea around getting proper liability coverage for your company is to mitigate risks. People in startup companies need to find advisors that they can trust, both corporate attorneys and risk advisors in the insurance sector, who can properly assess risk areas and apply appropriate, cost-effective coverage that meets their specific needs.
A word to the wise—if you focus entirely on price, that’s what you’ll get from an insurance provider—the lowest price. But all too often, you won’t get the coverage you need. This is sad, but true, so I always tell prospective clients that instead of price-shopping partners, they should test their trust and comfort levels with multiple people to find the right person to team with them on the success of their companies. When that catastrophic event occurs, you don’t want to be pointing to how cheap your premiums are—you’ll want to point to the policy specifics that have protected you all along and are about to bring you back to where you were.
About David Holmes
David Holmes is a Client Executive at TriSure of Raleigh, North Carolina, one of the state’s largest independently-owned commercial insurance brokerages. David and the team at TriSure have worked with multiple Forrest Firm clients, tailoring cost-effective insurance programs to meet a number of risk management needs in the area of property, general liability, umbrella policies, and more.