When a new company moves to secure funding and formalize operations, insurance is often an afterthought. But with a bit of effort, emerging companies can obtain strong insurance protection, maximize their existing coverage, and make themselves more attractive to future investors and other partners. Emerging companies should focus in particular on commercial general liability, data privacy and cyber liability, errors and omissions liability, directors’ and officers’ liability (D&O) and, depending on the number of employees, fiduciary liability and employment practices liability policies. An effective risk management strategy will also depend on strong external support from insurance brokers and counsel.
The following are five best practices for getting started on an insurance program:
1. Purchase strong insurance products that make sense for your company. Pricing for insurance can vary widely, and it is often true that “you get what you pay for.” At the same time, many policies will contain bells and whistles that appear attractive, but from which you will never get much value. Closely study the quotes you are offered, and make sure you understand what you are purchasing, what the policy will cover and what it will not. Ask your broker and/or outside insurance coverage counsel about specific insurers’ reputations for claims handling practices.
2. Take insurance applications seriously, particularly for D&O policies. Insurance applications are important legal documents, and failure to properly disclose information requested in those applications can have very serious consequences. In the case of D&O coverage, the initial application will often require the applicant to poll its officers and board members regarding pending or potential claims. For these reasons, it is best to have all insurance applications reviewed by an attorney.
3. Understand what constitutes a covered claim under your liability insurance policies. Most of the liability policies that you will purchase—including D&O and employment practices liability—broadly cover claims against the company, and treat them as covered events well before they ever evolve into lawsuits. This can be a double-edged sword. If a pre-lawsuit demand letter, subpoena or other written document qualifying as a claim is promptly reported to the insurer, then your company can obtain coverage for legal fees incurred before a lawsuit is even filed. But these same policies almost always limit their coverage to claims that are both made against the insured and first reported to the insurer during the same policy period. Thus, if a demand letter is sent during policy year one, but a lawsuit is not filed until policy year two, and you fail to report the claim until it develops into a lawsuit in year two, your company will lose coverage for an exposure that otherwise would have been insured.
4. Set high expectations for your broker. Your broker is an essential insurance partner and is in the best position to advise you regarding which coverages you should buy, what limits of liability you should carry, and how much risk you should retain (in the form of either deductibles or self-insured retentions). Your broker will also be able to compare you to other clients in the same industry and tell you what those companies are doing. The broker can give you a realistic appraisal of what is achievable for your company (such as available coverage and pricing) given current market conditions and your company’s risk profile.
While your broker will have deep expertise, do not be afraid to ask questions and insist on excellent client service. If you are not entirely satisfied, initiate a broker selection process. When brokers compete for your business, you will get detailed analyses of your current risk profile, insurance program and areas for potential change and improvement.
5. Know when to call a lawyer. Do you have a question about whether the language of your present D&O policy is broad enough to cover certain concerns? Are you trying to decide between two different insurers, but having trouble spotting any material distinctions between their policy forms? An insurance coverage attorney can advise you regarding the proper legal interpretation of a specific policy form. Such counsel are also best able to evaluate whether a particular loss or claim is covered under your company’s policies—particularly in close cases. Flexing some legal muscle to maximize your insurance coverage is a worthwhile investment and has a direct, positive impact on your bottom line—making your company a more attractive investment and business partner.