Insurance by Stages: Part 1, Early Stage.
This is the first part of a series where we explore the different types of insurance startups may need, depending on the stage of your company's growth.
For example, the insurance requirement of a back of the napkin idea, and two founders working in a garage, is quite different than a fledgling unicorn, with hundreds of staff, millions in capital raised, and aspirations to go public.
Regardless of your stage though, it's important to get the mix of insurance coverage right, to ensure you're not spending too much too early, and conversely, you're not under-covered when your company really starts to mature.
At UpSure we work with companies from the earliest of days, right through to companies that are being acquired (and have put in place a 7 year run-off policy a number of times that protects founders assets years after acquisition!) So over the last few years we’ve started to form a strong view of which types of insurance a startup needs at each stage.
Before we start though, we’ll just quickly qualify, that this isn’t advice and the right mix of policies will depend on exactly the type of company you’re building, and that talking to a friendly member of the UpSure team is the best way to go, but here’s a high level overview of how we think about the risk mitigation at each stage of your growth and some ball park figures to keep in mind.
Early stage
When you’re just at concept stage, there’s often very little risk, and naturally little to no exposures, but as you come to market even at the early stage there are some risks worth thinking about.
For many startups it’s tempting to defer even thinking about insurance until the company matures a little, or quite often the case, when a customer or partner of some kind asks to see a Certificate of Currency for one type of insurance or another, but even before that happens it’s worth thinking about offsetting two types of risk in particular.
(1) Cyber: Your growing tech platform is now holding other people’s sensitive data.
(2) Professional advice and representations: The company is starting to make promises (representations) to investors, customers, stakeholders that your business will naturally deliver on, but it’s worth noting that each and every one of these relationships brings risk that insurance can help greatly offset.
These are totally normal too, and it’s what being in business is all about, but as a director our goal is to help you get a better nights sleep and focus on the fun stuff, so this is where we like to work with each founder to set up the right coverage to let them really shine.
The most common types of policies needed at this stage are PI, professional indemnity, and ML, management liability.
There may be some other risks too, if you have employees, or a physical office at this stage, you’ll likely need Workers Compensation, and what’s known as a Business Pack, and if you’re a fintech or investment fund there’s a whole separate discussion around Financial Lines policies etc that are needed to satisfy regulation but we’ll come to that shortly.
If you’re a brand manufacturing a physical product too, it’s essential to have Product Liability Insurance in place, to offset the risk of injury or loss (think the night light that catches fire) and you can consider Product Recall insurance too, and even Marine Transit to protect the value of your goods as they cross the high seas and make their way to your distribution centres or customers.
So as you can see, insurance needs diverge quite quickly - even at an early stage, depending on the type of your business, but this is why we recommend working with a tech specialist broker that knows exactly how to categorise and protect your company.
Generally speaking though, whilst there’s a lot of insurance types, and it can feel overwhelming at the start, we always recommend adding some insurance costs in your founding budget, so when you raise a round of capital, or start to become profitable, this is factored into the business model as part of doing business.
Here are some examples of different types of startups, and approximate policies they pay at this stage, with revenues less than $1M and less than 20 staff.
Example 1: Enterprise SaaS company
A seed stage enterprise SaaS company with 2 founders and 4 key staff members, who’ve raised anywhere under $2M, and working remote and at a WeWork / Hub etc.
At this stage, typically here’s the policies we’d recommend and some very rough (2023) numbers.
Professional Indemnity: $2000
Management Liability: $1500
Workers Compensation: $1500
Cyber Insurance: $1000
If the company moves into its own office it’s important to get a business pack just to cover risk of break in, theft, someone tripping down the stairs etc but typically if you’re in a coworking space you’ll be covered under their policy as part of your membership. (Here’s how to check this).
Total $5500 / ~$500 per month.
Guesstimate and exclusions apply, e.g if it’s a SaaS platform for monitoring Low Earth Orbit satellites naturally the risk and exposures are much higher but you get the idea :) The cost of offsetting risk grows in proportion to the size of the risk.
Example 2: Early Stage Fintech
Fintech companies are a little more complex to insure than the average tech startup, afterall, the risk of moving money around, managing fraud, crime, and cyber risk, not to mention operating in a heavily regulated industry means getting the right mix of policies is a little more complex than your average startup.
However, this is something we love to help with, and have set-up countless times for some of Australia’s best known fintechs.
Typically the mix of policies includes.
Professional Indemnity: $15,000
Cyber insurance: $4,000
Management liability: $3,000
Total: approximately $22,000 but often this can be higher depending on whether the startup needs its AFSL, own payment processing, treasury, limits etc. The rule of thumb is the more pieces of the value chain that you’re solely responsible for, the more the risk, and then ultimately the greater the cost. Working with well regarded suppliers, such as existing AFSL holders, or tech partners can often reduce the risk and the costs of the insurance. Case by case but this is an area we have a lot of experience with and love helping founders solve.
Example 3: Marketplace
Again, depending on what the marketplace is for exactly, and how it’s structured, typically marketplace companies can be tricky to insure.
Broadly speaking we see two types of marketplace startups, with different risk profiles, knowledge based marketplaces, where suppliers are aggregated and services are delivered, think, marketplaces for marketing consultants, engineers, drivers, vs the marketplace for assets, such as properties, cars, tools, industrial equipment, you name it.
Each of these have their own types of risk, and a question we’re often asked is can I insure all the contractors under my platform, or can I insure all of the assets on my platform.
The short answer is it may be possible, and these are often referred to as Master Policies, but at an early stage some of these policies are prohibitively expensive and difficult to put in place. That being said, here’s an example of a structure we’ve helped put in place for a client recently.
When it comes to assets, these aren’t always the easiest businesses to insure, think the marketplace for renting power tools, and heavy machinery, where the cost of goods is quite high, and the likelihood of damage, theft, or even downtime can be very expensive.
Often in these cases, there’s a balance between working out how much risk the entity can absorb, and how much / if any can be offset by insurance.
It may not always be possible to get this type of coverage, but we’re always happy to help people think through that blend of commercial and insurance risk management. Some practical recommendations that we often use in this scenario, is can a bond be put in place, or can the terms and conditions adequately offset the risk in some other ways.
Insurance for these types of companies will always protect the platform, and the cyber risk, and the professional indemnity of the platform itself, but it does get more complex to insure all stakeholders within a marketplace.
Indicative costs of the right mix of policies
Professional Indemnity: $2,000
Cyber insurance: $1,500
Management liability: $1,500
Liability: $1,000
Total estimated cost at this stage $6,000, again with heavy caveats around what exactly the marketplace is facilitating :)
Example 4: Hardware
We all know the saying hardware is hard, however insurance for hardware startups, compared to some of the examples above is relatively straight forward.
Of course there are extreme examples, if you’re creating military equipment, or very large scale industrial applications hardware insurance can get complex, but generally speaking for consumer devices that are sold direct, and perhaps through retailers and distributors getting the right mix of policies can be easier, but there are complexities we help clients with such as getting world wide jurisdictional coverage, insuring the goods when they’re in transit, and even things like product recalls.
Public and Products Liability:
This goes by a few names, but traditionally known as Public and Product liability. Can the item hurt somebody, or cause damage to property? For many electronic devices, or toys, etc this is a serious risk that we recommend founders offset from the moment the products go to market.
Estimate cost: from $2,000 - $2M+ depending on scale and risk of the product itself, hence why it’s important to work with a broker that truly understands your product and can put forward the best possible case to underwriters, to give you the best terms and coverage without blowing the budget.
The other key policies needed, are much like other startups, particularly if it’s a connected or IoT product,
Cyber Insurance,
Management Liability, and potentially
Intellectual Property: $10,000
Product Recall: $1,000
Marine Transit Insurance: $1,500
Example 5: Food, Bev, FMCG
The Food, Beverage, and Fast-Moving Consumer Goods (FMCG) sectors face unique risks and challenges. Here's an overview of the typical insurance costs:
General liability: $2000 - Essential for legal and medical costs related to accidents or damages linked to your business.
Cyber if selling online: $1500 - Critical for businesses selling online, protecting against cyber threats, including data breaches.
Product recall: $750 - Insures against the costs of recalling a defective or contaminated product from the market.
Marine transit: Depends on the size and frequency of shipments - Tailored to your shipping needs, whether importing or exporting, servicing Australia, or worldwide.
Choosing the right insurance in the Food, Beverage, and FMCG industries is crucial for minimising potential financial losses. Always consult with an insurance professional to tailor the perfect policy for your unique business needs.
Example 6: Cleantech or Industrial
Cleantech and Industrial sectors often include offerings in Software as a Service (SaaS), hardware, or both, each requiring tailored insurance:
SaaS Offering: Insurance may include coverage for cyber threats and software failures.
Hardware: Coverage might focus on physical damages, malfunctions, and manufacturing risks.
Combination of Both: A hybrid insurance approach may be needed for businesses integrating both hardware and software.
Specialised risks also need consideration:
Greenwashing: Liability insurance for misleading environmental claims.
Professional Indemnity (PI): Coverage for inadequate advice or services.
Misrepresentation/Machine Learning (ML): Insurance for errors or biases in AI algorithms.
Directors & Officers (D&O): Legal cost coverage for organisational leaders.
Engaging an insurance professional specialising in Cleantech or Industrial sectors ensures the right coverage for these unique and multifaceted business needs.
Example 7: E-commerce
Public and Products Liability insurance is vital for businesses distributing products. Here's why:
Importing Products: Even if not manufacturing, importing deems you as the manufacturer, necessitating your own Public and Products Liability insurance for legal and compensation coverage.
Reselling Australian Products: While reselling Australian-made products may offer rights of recourse against the manufacturer, having your own policy ensures specific protection without gaps or disputes.
Using a Third Party: Relying solely on third-party coverage requires understanding its extent and potential shortcomings. Without your own policy, you may risk financial exposure.
UpSure’s Partnership: UpSure, in collaboration with OnlineSellersInsurance, now provides tailored insurance solutions for e-commerce companies, handling Public and Products Liability insurance through a dedicated team.
In both importing and reselling scenarios, having your own Public and Products Liability insurance policy is essential. Partnerships like UpSure's offer specialised solutions, ensuring that e-commerce companies are well-protected and guided in this complex insurance landscape.
