Launching a startup is an exciting journey, and it's essential to grasp the insurance costs involved to keep your business secure. 

In this guide, we’ll cover the various insurance types relevant to startups, giving you a detailed overview of what to expect cost-wise based on the stage and vertical you’re in. Whether you need information on general liability, professional liability, or cyber insurance, we've got you covered. By the end of this post, you'll be equipped with the insights necessary to budget effectively and protect your business from unforeseen risks.

Legacy insurance limitations

Working with legacy insurance solutions can be a frustrating and inefficient experience, particularly for fast-paced startups. Outdated policies often fail to cover the unique risks associated with tech-driven businesses, leaving you vulnerable to unexpected challenges. The lengthy application processes of traditional insurance providers can be a major hurdle, wasting valuable time that could be better spent growing your company. 

These providers may also have a limited understanding of the tech industry, resulting in coverage that doesn't fully address your specific needs and leaving gaps that could cost you in the long run. This is where made-for-tech business insurance comes into play. 

By investing in a customized startup-focused insurance solution, you gain access to a policy tailored specifically to your industry, designed to keep up with the rapid pace of innovation, and which provides coverage aligned with the unique risks and requirements of your business. Benefits include:

• Faster application processes
• More relevant coverage
• Peace of mind knowing that your startup is well-protected

With the right insurance, you can push your business forward with confidence, focusing on growth and innovation, knowing you’re prepared and covered for unexpected challenges.  

How much does startup insurance typically cost?

The cost of your insurance can vary significantly based on the type of policy and the specifics of your business, such as its stage and industry. To get a bit more technical, pricing for insurance coverages is fundamentally based on the perceived frequency and severity of potential claims. Frequency refers to the likelihood of a claim occurring during the policy period, while severity pertains to the potential cost or payout of a claim. Simply put, the higher the frequency and severity, the higher your coverage costs will be. Understanding these factors can help you better navigate your insurance options and make informed decisions for your business.

For example, general liability insurance, which covers common risks like third-party injuries and property damage, can cost as low as $500 and $1,000 per year for startups. As your business grows, you might see these costs go up due to needing higher coverage limits and dealing with more risks.  Additionally, a Business Owner's Policy (BOP), which bundles general liability and property insurance, is a cost-effective option, typically costing between $500 and $1,000 per year. This package provides comprehensive coverage for startups in various sectors.  

If you're making or selling physical products, you'll need product liability insurance to protect you from claims related to product defects and safety issues, which generally costs between $1,000 and $3,000 annually, although this cost can be higher depending on the perceived frequency and/or severity of potential claims. 

For tech startups, directors and officers (D&O) insurance and data/cyber liability insurance are essential. D&O insurance, which protects the personal assets of your company's leadership in case of lawsuits, usually costs between $4,000 and $7,000 per year. Data and cyber insurance, which safeguards against data breaches and cyber-attacks, typically ranges from $2,000 to $4,000 annually. These specialized policies are crucial for protecting your startup in high-risk industries from significant financial losses.

General Liability

General Liability Insurance is crucial for protecting your business against common risks, covering claims of bodily injury, property damage, and personal and advertising injury. If someone gets hurt on your premises, your operations cause property damage, or you're accused of libel or copyright infringement, this policy has you covered. It handles medical expenses, repair costs, legal fees, and settlements, allowing you to focus on growing your business without the constant worry of potential lawsuits. Think of it as “peace of mind” insurance for everyday operational accidents.

Most standard contracts require a general liability limit of one million dollars to enter into agreements, which is the amount most tech companies start with. The “limit” is the maximum amount the coverage will pay in claims. Generally, the larger your company, the higher the limit you’ll need. For example, a Series A company might take out a $1-2 million limit, a Series B company $2-3 million, and a Series C company $2-5 million.

GENERAL LIABILITY TYPICAL LIMITS:

• Seed: $1 million
• Series A: $1-2 million
• Series B: $2-3 million
• Series C: $2-5 million
• Growth: $5+ million

Beyond your capital raise status — and perhaps more importantly — company revenue typically has a direct correlation with the amount of General Liability coverage a company should maintain. Higher revenues often imply a higher frequency and severity of potential claims. 

For instance, a Series Seed/A/B company with $2 million in revenue selling an autonomous lawnmower should have General Liability coverage and as their revenue grows to $10 million, they should increase their General Liability coverage (even if they never raise another round of funding) because higher sales volumes increase the likelihood of claims. Additionally, if the product evolves to become more dangerous, such as incorporating a bigger or sharper blade, the potential severity of claims also increases. 

Additionally, there are General Liability Add-Ons that can cover employee-hired and non-owned autos and administrative mistakes on your employee benefits programs. However, keep in mind that General Liability Insurance only covers third parties if they get hurt, not your employees; for that, you’ll need Workers Compensation.

If you’re curious to learn how much General Liability Insurance for your company would be, get a coverage recommendation now in just a few clicks here.

Cyber insurance

If the thought of a data breach, hacking, or ransomware attack sends a cold chill down your spine, rest assured that you can be covered for these cyber risks and others. 

Cyber coverage focuses on the collection, storage, and access to sensitive data, which varies in sensitivity. For example, private health information (PHI) is more sensitive than an email address. Both are sensitive, but PHI breaches carry greater severity; the more sensitive data a company stores, the higher the potential claim severity.

Cyber insurance is essential for safeguarding your business against the financial and operational impacts of cyber incidents. It covers the costs of notifying affected customers, providing credit monitoring, handling legal fees, and compensating for lost income if your operations are disrupted. It also covers ransom payments, forensic investigations, and managing reputational damage.

In the event of a cyber attack leading to a lawsuit, cyber insurance can cover your defense costs and any settlements, fines, and judgments. Like general liability insurance, it provides a critical safety net, positioning your business to withstand and recover from such incidents.  

Errors and Omissions 

Errors and Omissions (E&O) insurance, or professional liability insurance, helps to shield your startup from claims of negligence or inadequate work that causes your customer a financial loss. This coverage is vital if you or your product provide services or advice, protecting you from lawsuits due to mistakes or oversights. 

E&O insurance covers legal defense costs, court judgments, and settlements, so you can focus on growing your business without the threat of financial ruin from legal claims. Typically, E&O insurance costs between $500 and $3,000 per year, depending on your industry, business size, and coverage limits.  

ERRORS & OMISSIONS RECOMMENDED LIMITS:

• Seed: $1 million
• Series A: $2 million
• Series B: $3 million
• Series C: $5 million
• Growth: $10 million

As your startup matures, you'll need higher coverage limits, increasing your costs but providing essential protection. Investing in E&O insurance at every stage ensures your startup's stability and credibility, allowing you to scale confidently and meet client expectations. 

What factors affect the price of startup insurance?

In addition to the type of coverage and the stage of your business, there are several factors that can affect the price you’ll pay for startup insurance. And, good news: in a couple instances, you can proactively make decisions that will likely lower your costs. 

Industry and business type — The specific area of the tech industry you operate in directly impacts your risk levels and insurance costs. High-risk sectors within tech — like cybersecurity, biotechnology, and fintech — naturally come with higher premiums, reflecting the unique challenges and potential liabilities they face.

Business size and revenue — As your tech startup grows, adding more employees and increasing revenue, you'll typically face higher insurance costs. This is due to the greater exposure to potential claims and liabilities that come with a larger, more complex operation.

Location — The location of your business can significantly impact your insurance costs. If you’re based in areas with higher litigation rates, like California or New York, or regions with stringent regulatory requirements, such as Massachusetts or Illinois, you can expect higher premiums. These factors increase the risk for insurers, which in turn raises the cost of your coverage.

Claims history — Your insurance premiums can rise significantly if you have a history of previous claims. Insurers view businesses with frequent or significant claims as higher risk, which translates to higher costs for your coverage. For example, if your tech startup has faced multiple data breach claims in the past, you’ll likely see increased premiums as a result.

Coverage limits and deductibles — Opting for higher coverage limits provides greater protection for your business but also results in higher premiums. Conversely, choosing lower deductibles can reduce your out-of-pocket expenses during a claim but will increase your overall insurance costs. For instance, if you choose a $5 million coverage limit instead of $1 million, your premiums will be higher. Similarly, selecting a $1,000 deductible instead of $5,000 will lower your immediate costs in the event of a claim but raise your annual insurance expenses.

Policy terms and conditions — The specifics of your policy, such as exclusions, coverage extensions, and endorsements, can significantly impact your insurance costs. For example, adding an endorsement for cyber liability coverage to protect against data breaches will increase your premiums. Similarly, including coverage extensions for international operations can raise your insurance costs, but ensures comprehensive protection for your expanding business.

Cybersecurity measures — The strength of your cybersecurity protocols can significantly impact your insurance costs. Implementing robust cybersecurity measures and practices can reduce the likelihood of data breaches, potentially lowering your cyber liability insurance premiums. For example, if you employ advanced encryption methods and regular security audits, you’re likely to get a better rate. Additionally, having a dedicated cybersecurity team in place can further decrease your premiums by demonstrating your commitment to protecting sensitive data.

Risk management practices — Implementing strong risk management practices and safety protocols can significantly lower your insurance costs, because your business is viewed by insurers as less risky. If, for example, you establish comprehensive employee training programs on workplace safety, you can reduce the likelihood of accidents and claims. And, regularly conducting thorough risk assessments and addressing potential hazards proactively can demonstrate to insurers that your business is committed to minimizing risks, leading to more favorable insurance rates.

Intellectual property risk — As a tech startup, you often deal with proprietary technology and intellectual property, which can significantly impact your insurance costs. Policies covering intellectual property risks, like patent infringement, are essential for your protection, even though they can be more expensive. So, if your startup has developed a unique software algorithm, securing insurance against potential patent claims ensures you are safeguarded against costly legal battles. And, if you hold valuable trademarks, having coverage for intellectual property disputes is crucial to protect your brand and innovation from infringement.

Assessing your coverage needs at every growth stage

Determining the right insurance coverage for your startup demands a precise understanding of your organization’s specific needs and potential risks. 

Purchasing your first policy

The first type of coverage most startups purchase is General Liability Insurance. This policy covers injuries or damages that happen at your office, and helps to protect against the costs of legal defense and settlements. It’s a foundational layer of protection every startup needs to handle unexpected incidents and it is an included requirement in most standard contracts.

Business Property Insurance is another common type of insurance coverage startups purchase early on. This policy safeguards your office equipment against damage or theft. For instance, if a fire breaks out in your office, damaging several workstations and other equipment, Business Property Insurance can help cover the cost of repairs or replacements. It allows you to quickly restore your office setup and minimize downtime, so that your business remains operational and efficient. Business Property Insurance can also cover the cost of replacing stolen work items like work laptops or work phones for your remote employees. 

Many investors, financial institutions, landlords, or customers will also require these general coverages before engaging in business with you:

• Directors and Officers
• ‍Crime‍
• Key Person‍
• Errors and Omissions‍
• Cyber‍
• Employment Practices Liability‍
• Workers’ Compensation‍
• General Liability‍
• Business Personal Property

Get coverage recommendations now in just a few clicks here. 

Understanding your risk management strategy

Creating your startup risk management strategy is like ensuring your house is safe every day. 

You begin by identifying potential trouble spots, such as a loose step or a leaky pipe, which in your business could mean anything from cybersecurity threats to potential liabilities from client interactions. Next, you take concrete steps to address these issues — like implementing robust cybersecurity measures or training employees on safety protocols. You also secure the appropriate insurance coverage, such as general liability insurance for customer injuries or cyber insurance for data breaches, to protect against these risks. 

By consistently evaluating and addressing potential hazards, you ensure your startup is prepared for any challenges that come your way, keeping your business resilient and secure, no matter what happens.

Risk management vs. milestones   

Managing risks day-to-day is just one part of the equation. As your startup grows, you will encounter significant milestones that demand a strategic shift in your insurance coverage. While risk management focuses on maintaining daily safety and readiness, addressing key milestones ensures your insurance coverage evolves in-step with your business. 

Continuing the house analogy, imagine you start with a small house (your startup) and then you add a room (hire your first employee) or get a swimming pool (launch a new product). Each of these big changes means you need to update your insurance to cover the new risks. So, as your business grows and changes, you need to get new or different insurance to keep everything safe.

Recognizing the difference between ongoing risk management and preparing for pivotal growth moments is essential for comprehensive insurance planning. This dual approach empowers you to stay prepared for both the everyday operations and the transformative changes in your business journey.

Talk to a pro before renewal 

It's important to stay up-to-date on startup insurance to keep your business safe. Regularly check your risks and be ready to adapt to new challenges. But even with a solid understanding, having a conversation with a Vouch insurance professional who specializes in startups can be incredibly helpful. 

By combining your own vigilance with Vouch’s expertise, you'll be better prepared to handle the complexities of startup insurance and protect your company's future.

The Vouch approach to affordable insurance for tech  

Understanding insurance costs can be daunting but Vouch Insurance Advisors are ready to streamline the process for you. They are experts in identifying your specific needs and guiding you through the process expeditiously, ensuring you understand all aspects of your insurance costs. 

With Vouch by your side, the process of securing the correct insurance coverage becomes efficient and manageable, instilling the confidence that you're making informed decisions and staying protected as you grow.

Discover alternatives to traditional insurance for your startup and find tailored solutions that fit your unique needs. And, with just a few clicks, get a coverage recommendation based on your business stage and industry vertical.