Startup Insurance

If you consider what business insurance is supposed to do - cover your business in the event of a major injury - there is little chance that your startup can afford all its coverage needs. How do you prioritize? First, our experts - accountants, lawyers, capital advisors and insurance brokers - say to treat insurance as any other investment your business would make. Second, break coverage up into two categories: what you are required to have and what risks you are trying to cover. We agree and add a third note: "…based on the capital you have to spend at the time you are investing in coverage."

Insurance You Need

Start with the insurance required by your state or other jurisdiction. Nearly all states require worker's compensation insurance for every business with employees. There may be other insurance required by your state. Check with your state's insurance department to find out what your business needs. Other insurance coverage like general liability, fire and property may be required by your service providers, customers and landlord in order for you to do business or rent space.

You also should know the types of insurance which are standard in your industry. Experienced entrepreneurs and mature businesses in your field can be expected to know what are the key risks. Within your budget, try to mirror their coverages, giving yourself leeway where your business may have less risk than theirs. But remember, startups have no claims history, so your company's rates will be toward the higher end of the price spectrum.

Risk Coverage - Business Investment Cycles

As your business grows through various cycles, it will require new capital and new capital partners. Each capital partner will analyze the risk-reward of making an investment in your business. It pays for you to take the same approach when deciding on what insurance coverage you need at the start-up stage. Beyond the required coverages, look to your stated business goals for the startup period. What do you hope to accomplish during this period? After analyzing your business, insure those areas that pose the greatest risks. For example, if production is the emphasis of this part of your business cycle, make sure that production facilities and equipment are suitably covered. NOTE: Also make sure that your work force is well trained in safety and work flow procedures. The best insurance policy in the world will not adequately repay you for the loss of key personnel and the resulting production declines. 

Capital Constraints

After you have completed your "insurance investment" analysis, prepare a schedule of the coverages you require and the bids. Include that number in your company's spending budget of available funds. If you have a limited amount of capital, your planned insurance coverage may be taking capital away from other parts of your business growth plan. Just like an outside investor, these are the business decisions you need to make in order to cover the possible risks.

To keep your costs as low as possible, don't be afraid to negotiate your premiums with the broker or company. And remember, you can reduce the costs by self-insuring - by increasing the amount of the deductible, your premium costs will be reduced. Treat the deductible as the amount of risk you are willing to assume before making a damage claim. For example, if $500 is your property deductible claim, then you are calculating a self-insurance risk threshold of $500 per claim. NOTE: When it comes to self-insuring, it is a good rule of thumb to have some insurance rather than none. Insure for catastrophe if you can't afford anything else.

As your company grows, treating insurance coverage as an investment will help you analyze your business at each stage. Not only will it keep you in touch with insurance needs for new hires and purchases, it also will require you to continually evaluate the use of your scanty capital resources. Not a small benefit for the time when you need to speak with those outside investors about new capital.