There's little that is intuitive about the startup world. You have a great idea, yes. But now you need to learn about fundraising. You need to understand the legalities involved in your particular line of business. You need to create polished, slick pitch decks that communicate the nitty gritty details of your business, in under 15 minutes. You have to register your startup. You have to apply for various permissions. You have to understand accounting.
And all of this, before you hire your first employee.
However, as most startup founders will tell you, you'll learn as you go. Your knowledge gap will narrow with time. You may get a few things wrong, but each mistake only teaches you, and makes you a stronger entrepreneur. There is just one exception to that rule: insurance.
Think about it. Why do you get insurance? When you boil it down, insurance is meant to give you a soft landing when things go wrong. It is supposed to safeguard you. But, if you get your insurance wrong, your worst day just gets much, much worse.
On the flip side of that argument, startup founders often take on risks that can be easily covered with insurance. Most of the time, it's a matter of simply not knowing enough.
Insurance for Startups 101: Protecting your People
The first key asset the startup has is you, the founder. The next is the team you're building.
Post Covid-19, it is now mandatory for businesses to provide Group Health Insurance for their employees, even when it is a team of just one. These policies typically cover hospitalisation expenses for employees and even their immediate family in some cases. Group Term Life Insurance, on the other hand, offers a fixed payout/monetary benefit if a worker passes away during regular employment.
However, there is specific insurance that covers another key risk: injury at work, or injury arising from the nature of work. While Group Personal Accident Insurance is not mandated by the Indian Govt for startups, it is nevertheless a good practice. This type of insurance policy provides coverage against accidental death, permanent or partial disability, and medical expenses resulting from an accident. The premiums for these policies are relatively low compared to other insurance policies, and the claim settlement process is hassle-free and straightforward.
Workmen's Compensation Insurance provides benefits to employees who are injured or become ill as a direct result of their jobs. It is a no-fault system, meaning that benefits are paid regardless of who was at fault for the injury. The benefits can include medical treatment, reimbursement for medical bills, and disability benefits. Benefits can even include death benefits for dependents if the worst happens.
It is important to understand the difference between the two: Group Personal Accident Insurance provides coverage for accidental bodily injuries or death caused by external means, while Workmen's Compensation Insurance specifically covers injuries or diseases arising out of or during the course of employment. Another way to look at it is this: Group Personal Accident Insurance protects your employees, while Workmen's Compensation Insurance provides indemnity to employers for all sums for which the employer may be liable in respect of injury to their employees by accident or disease.
Additionally, your business also needs to be safeguarded against financial strains and losses arising out of the death or disability of key people: be it the founders themselves, key technical staff, and any others whose absence would significantly set your business back. Key Man Insurance policies cover just such eventualities. In the event of the key person's death or disability, the policy provides the company with a financial cushion to cover expenses, recruit and train a replacement, repay debts, or compensate for lost revenue. Startups are fragile, and particularly prone to these risks as the Key Man in question could be someone who is difficult (or expensive!) to replace.
On the flip side is Directors and Officers (D&O) Liability Insurance. D&O insurance is a type of insurance that protects the personal assets of corporate directors and officers, as well as their spouses, in the event they are personally sued by employees, vendors, competitors, investors, customers, or other parties for actual or alleged wrongful acts in managing a company. This insurance covers legal fees, settlements, and other costs. D&O insurance is the financial backing for a standard indemnification provision, which holds officers harmless for losses due to their role in the company.
While D&O insurance protects directors and officers from personal liability arising from their management duties, it does not typically cover losses resulting from employee dishonesty. Employee Dishonesty Coverage is designed to cover these types of losses. This coverage is typically added to a Business Owner's Policy (BOP) or can be purchased as a standalone policy. D&O Insurance can also be tailored to provide coverage for damages to the reputation of a company or its directors and officers, Kidnap and Ransom Insurance covers expenses related to kidnapping, ransom demands, and other related incidents, Environmental Liability Insurance covers pollution-related claims and cover for regulatory crisis can provide coverage for legal fees and settlements related to regulatory investigations or enforcement actions
In India, the Securities and Exchange Board of India (SEBI) has mandated that the top 500 listed entities by market capitalization must have D&O insurance for their independent directors. While it is not mandatory for Indian startups, it is often recommended as a best practice to protect the personal assets of the company's directors and officers and to help attract and retain top talent.
Moreover, not having D&O Insurance can often prove to be a stumbling block when you seek funding. Just like you wouldn't want to put yourself and your family at risk of financial ruin for the sake of someone else's business, neither do your potential investors!
In sum, the types of insurance applicable to Indian startups to protect against risks to their people as well as risks arising from the actions of their people are:
● Group Health Insurance
● Group Term Life Insurance
● Group Personal Accident Insurance
● Workmen's Compensation Insurance
● Key Man Insurance
● Directors and Officers (D&O) Liability Insurance
Insurance for Startups 101: Protecting your Property
Irrespective of whether you're a cloud native business or a traditional brick and mortar business, there are certain risks that are inherent to starting a commercial enterprise. For instance, everyone needs Fire Insurance and Burglary Insurance.
Fire insurance is essential for startups to protect their physical assets, such as office space, equipment, and inventory, from the financial losses caused by fire-related damages. This insurance provides coverage for the repair or replacement of damaged property, ensuring business continuity and financial stability in the event of a fire
Similarly, Burglary insurance is crucial for startups to safeguard against losses resulting from theft or burglary. This insurance covers the theft of valuable assets, equipment, or inventory from any of your premises, helping you recover financially, faster.
If you are in a business that involves the production, storage and/or transportation of physical goods, then Fire and Burglary Insurance do a great job of protecting them when they are in your premises. But what happens when they are on the way to your retailers, wholesalers and end customers? This is where Marine Cargo Insurance and Marine Transit Insurance come in.
Marine Cargo Insurance provides coverage for the goods and cargo being transported from one country to another, regardless of the mode of transportation, which could be by air, sea, or land. This insurance policy covers the risks associated with international trade, including theft, damage, and loss of goods during transportation. If your startup is engaged in any form of cross border trade, Marine Cargo Insurance is essential.
On the other hand, Marine Transit Insurance, also known as Inland Transit Insurance, covers the goods and cargo being transported within a country's boundaries, typically through roadways or railways. This insurance policy protects the goods from losses or damages during transportation within the country.
In sum, the types of insurance you can explore to give you adequate coverage for risks relating to property are:
● Fire Insurance
● Burglary Insurance
● Marine Cargo Insurance
● Marine Transit Insurance
Insurance for Startups 101: Protecting your Product
Now that your product has reached the consumers' hands, you're okay, right?
Unfortunately, no. There have been several occasions in recent history when companies have had to face significant liabilities arising out of damage or injury to a third party or third-party property damage caused by the products manufactured, sold, or distributed by the business. There are several examples of this. In 2015, General Motors paid $900 million to settle a criminal investigation into its faulty ignition switch defect. Monsanto's Roundup weed killer was linked to cancer, and Monsanto has faced billions of dollars in settlements for victims.
Product Liability Insurance is a type of insurance policy that offers coverage for legal and financial liabilities, protecting your business from potential lawsuits or legal claims due to product defects or malfunctions. If you're in the business of making physical goods, this one's for you.
Now, what happens when you realise there is a problem with your product before customers do? You need to recall it to protect yourself from liability down the line. However, recalls aren't cheap. You need to consider the costs of recalling a product, including the cost of shipping, storage, and disposal of the recalled product, as well as the cost of notifying customers and providing replacement products or refunds. Fortunately, all these costs are covered by Product Recall Insurance.
In sum, the types of insurance you can explore to give you adequate coverage for risks relating to product are:
● Product Liability Insurance
● Product Recall Insurance
Insurance for Startups 101: Protecting Against Cyber Threats
If you're a startup engaged in anything to do with software, you need Cyber Insurance. If you're a business that deals with customer data, you need Cyber Insurance. If you deal with proprietary data of any kind, you need Cyber Insurance.
From phishing to business espionage, intellectual property theft to ransomware, cyber bullying of your employees, to data breaches - they're all part and parcel of running a business today. You can, and should, invest in a secure data infrastructure, put your staff through training, and hire auditors who can expose your vulnerabilities. But remember, this is a world where JP Morgan Chase was the victim of a data breach. You need to take all the precautions you can take, and also get insurance.
Cyber insurance provides coverage against financial losses resulting from cyber attacks, such as data breaches, cyber extortion, and business interruption. It works on four levels:
● Financial Protection: It helps you with costs associated with data recovery, legal fees, and business interruption after a cyber attack, helping to mitigate financial losses.
● Reputational Damage: Cyber Insurance can also cover the costs related to PR and communication efforts to restore the business's image.
● Risk Assessment: Insurance providers assess a business's cybersecurity risks and offer recommendations for risk mitigation, enhancing the startup's overall security posture.
● Legal Support: Some of these policy providers help with legal support during a cyber attack, including legal representation, fines and penalties coverage, and regulatory compliance assistance.
When To Get Insurance?
The simple answer: as soon as possible.
However, we know how precious every penny is, particularly in the early days. There is no one-size-fits-all here. Finding the right insurance products, suited to your needs, and purchased in time to make the most of your monies requires expertise. It also requires an expert who is playing on your team, and whose interests align with your own. Moreover, this expert also needs to understand startups and their peculiarities at a general level, and your business, specifically.
This is where IDFC FIRST Bank comes in with a dedicated Startup Banking offering: FIRST Wings. With a curated bouquet of offerings customised to the needs of startups at every stage of growth, IDFC FIRST Bank is working hard to create an ecosystem of enablement for its startup banking customers. From a current account that auto sweeps your idle funds into FDs, to corporate credit cards that earn you rewards you can really use, to helping you navigate the ins and outs of FDI, to helping you find just the right insurance, IDFC FIRST Bank is invested in your growth, and playing on your team.
The offering is a simple one: you need an expert who understands insurance and understands your business, and can negotiate with insurance providers on your behalf. IDFC FIRST Bank gives you exactly that. Moreover, IDFC FIRST Bank is able to leverage its size to not only get you a better deal overall, but also help you during the claims process, should there be any hiccups.
Isn't it great when something just works, just like you'd want it to, without making any unnecessary demands from you?
Learn more about how IDFC FIRST Bank's unique approach to startup banking can give your startup that extra advantage here. https://www.moneycontrol.com/LTU
Moneycontrol journalists were not involved in the creation of the article.
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