Insurance is a necessary element of any business. By law, you must carry certain types if you have employees. Moreover, you will be required to hold different types of insurance to complete certain types of transactions. So, let’s dig in.
Insurance carriers are unlikely to sell you insurance directly. And you want the ability to compare carriers and find the best coverage for your scaling company. This is where brokers come in and why they can be valuable to you.
Brokerage firms vary in size and specialty. There is a lot of benefit to hiring a firm that understands the unique nature of startups so they can scale with you, especially as you expand into multiple states. The company you are now is not the company you will be in 24 months. By working with a brokerage firm (a good one!) that can grow with you, you’ll develop a strong relationship and a track record of performance and safety. In addition, you’ll give the brokerage firm a chance to get to know you and learn all about your business, making them better advocates on your behalf.
Why is a strong relationship with your insurance broker meaningful? Because you’re doing something new. Insurance carriers don’t like new; they prefer battle-tested, trustworthy, and understood by actuarial science. You will want a team that intimately understands what you are doing and will work on your behalf to secure great coverage, even when it means presenting novel business models to ancient insurance carriers.
Here are a few other things to keep in mind about the brokerage firm you select:
1. Make sure you like the team. You will be working with them regularly to secure certificates, endorsements, and updates to your policies.
2. Find a firm with the breadth and resources to help with risk analysis and operational safety, especially if you have or plan to have physical operations. They could help you implement safety programs and practices that save you money over the long term.
3. It doesn’t hurt if the firm has an exceptional name that investors recognize and know will be with you for a long time.
4. Most firms should have financing options available. Such opportunities will be vital as you grow, as insurance premiums can increase fast as you need to ramp up coverage. Installment payment plans are a way to smooth out cash flow.
5. Bonus points if the brokerage firm has previously worked with climate tech companies. I can’t say it enough. You will want a team who gets it and can translate it to an insurance carrier.
You’ve found a great brokerage firm and a great broker who is excited to work with you and your business. Now, you’ve got to ask, what do I need insurance for?
A few needs will quickly emerge:
1. If you hire employees, you will need workers’ compensation insurance to cover employees injured on the job. One exception worth noting: if you enroll in a professional employer organization (PEO), the PEO will likely cover your workers’ compensation insurance, so you will not need to get a separate workers’ comp policy.
2. If you are leasing space, the lease you sign will likely contain provisions requiring you to obtain commercial general liability insurance, which covers injuries suffered by third parties (i.e., not you or your employees), and property insurance, which covers damage to your personal property.
3. As you begin operations, whether research and development or product manufacturing, you’ll want to ensure you have all the above, plus automobile insurance covering employees in owned, hired, and unowned automobiles and an umbrella policy.
4. Suppose you have a board of directors that includes folks beyond the founders. In that case, certain board members may ask for directors’ & officers’ liability insurance (D&O) insurance to cover the directors if a shareholder claims the directors have breached their fiduciary duty.
5. As you scale your business, you may want to consider employers’ professional liability insurance (EPLI), cybersecurity insurance, and others, which your broker will undoubtedly present to you.
6. If you are raising capital, especially a priced equity round, you will likely be representing and warranting in the stock purchase agreement that you have the basic insurance coverage described above.
7. If you are working with any third parties in their facilities (i.e., pilot partners, customers, or even contract manufacturers) or hosting events in any rented locations, these third parties may want to ensure your basic insurance policies are in place and conform to their requirements.
In certain instances, the specific types of coverage you need will be specified in a key document. A proposed lease for your office or R&D facility may have a particular provision about the coverage required under the lease. A customer or project partner may provide an insurance requirements sheet before access is provided to their facility or project site. This helps ensure you get exactly the coverage you need.
Otherwise, once you’ve met these requirements, it is up to you and your broker to determine what insurance keeps your business safe and aligns with your budget. This is an exercise in balance. Be mindful that overinsuring, especially when the cost of capital is very high in the early stages of a startup, can be just as troublesome as underinsuring.
Once you’ve identified what you need, it is time for you and your brokerage team to get to work. Remember that you will be filling out many applications, coding employees, projecting revenues, and breaking down your property, plant, and equipment values. That’s part of the process. Also, recognize that if you’re developing a novel technology, you will be fitting a square peg into a round hole when completing these applications. That’s okay, too. And that is where a great broker ensures the application contains the necessary information to secure the right insurance.
Once your broker has taken your applications out to market and secured some options, you’ll want to review these options with your broker in a format that allows for easy comparison. You’ll want the carriers to be appropriately rated (i.e., the measure of quality of a carrier), coverage amounts to meet the minimum requirements you need for your lease, and pricing to be reasonable. But don’t be surprised if it is all a bit higher than you budgeted. Remember, you’re a new client without a track record and with novel technology.
Your broker will make recommendations, but you’ll ultimately need to pick the best policies, carriers, and coverage for your company. You’ll likely secure annual coverage, so ensure the policies are well-positioned to help you navigate the following year. Secure what you need now and build a roadmap with your broker for future policies you may want to add as you scale.
Once you select, you’ll be asked for approval (and corresponding signatures) to “bind” coverage. Binding means the coverage will be put in place, and you’ll be charged the premium, usually on net 30 terms or sooner.
Now that you’ve got insurance, you’ll be asked to provide evidence of coverage to various parties who want to ensure they have proof of your insurance. The best way to do this is to ask your insurance broker to provide you with a certificate of insurance (COI) that lists all the relevant information about your policies and coverage. This COI is written on an ACORD form that is standard across the industry. You don’t need to know what the ACORD acronym stands for, so I won’t tell you.
Keep your COI handy, as you’ll be asked for it, and an efficient response makes you look good.
Some parties will ask for an endorsement or to be added to your policy as an additional insured. When such questions arise, reach out to your broker who can help with these issues and ensure you provide the proper evidence to the requesting party.
In addition, you’ll receive your actual insurance policies from your broker. Keep your policies and COI in your document management system for easy transport to your data room when fundraising—more on the Goldilocks data room in a future blog post.
Once you have acquired insurance for your startup, the best thing you can do is build a strong track record of performance and safety. An absence of claims will help you manage your premiums going forward and create more competition from carriers for your business.
For startups building hardware or deploying physical systems, that means creating a culture of safety that permeates your operations. Safety programs and training invest in your people, and your product, as a safer organization will undoubtedly be financially stronger. The costs for workers’ compensation insurance can skyrocket out of control if you endure some claims in the early years, and it can often take years to recover once you’ve established an unsafe track record.
Before you know it, a year will be up, and you will be completing the annual review and renewal of your policies.
Some items to note:
1. Secure a renewal date that doesn’t fall on December 31 or January 1. No one likes dealing with renewals at the end of the year, but many of them happen during that time. Pick another renewal cycle, say April 1 or October 1, and you’ll likely get more carriers who have the time to review your applications and offer proposals.
2. Remember that insurance costs will scale as you expand into new states. New York and California are notoriously high-price states for certain types of insurance, such as workers’ compensation and general liability insurance. Leasing space in California may also require you to have specialty insurance, such as earthquake insurance.
3. Take stock of where your company is from a revenue perspective and a headcount perspective. Evaluate the potential to add new policies (maybe EPLI works now at 120 employees, but it seemed overkill at 20 employees). And create a program for the forthcoming year that responsibly addresses your startup’s risks at a cost that aligns with your runway.
Renewing your policies is an important step forward. It signifies the maturation of your business and a commitment to solid operations. And for climate tech companies whose technologies will be deployed in physical plants or stand-alone projects, there is an added benefit. A strong track record and a keen understanding of risk in your business could open the door to expanding your insurance program to address the risks inherent in project development, reducing some of the barriers to first-of-a-kind project finance. But that is a post for another day. I insure it.