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Startups, Risk Management, Business Insurance: Deep Analysis

risk management plans for startups

A startup is a small business that is founded by a group of people. The initial capital for a startup is usually provided by the founders of a startup company or a person who has agreed to sponsor a startup business. Startups can also opt for small loans, take the help of government initiatives, or acquire funding from NGOs or charities. Startups usually provide a unique product that cannot be found elsewhere in the market. The quality of this unique product is what helps a startup business to flourish or leads to its decline.

In the initial period, startups do not earn much of a profit. This is because a significant amount of their capital is used in developing, testing and marketing its product. While starting a startup business is difficult enough, sustaining it, in the long run, is even more difficult. The quality offered by the product may go down, thereby, leading to a loss in its business, it might get sued by its clients for any negligence, and any other multitude of crises could occur. Hence, to protect itself from such eventualities, there are a number of insurances that startups can buy so that it can protect its business interests and avert its business-related risks. An account of some of the insurances that startups can buy is given below.

Errors and Omissions Insurance

Errors and Omissions Insurance are purchased by businesses to protect their owners and employees from professional incompetence and negligence complaints. This insurance helps pay for court cases as well as out of court settlement costs. The amount that is to be paid by the insurance company during such eventualities is usually specified in the insurance policy document.

The Errors and Omissions Insurance can be very beneficial for those startups who are working in the IT sector. It can help the startup in several situations. For example, there can be a problem in the software used by the startup which then may lead to processing or executing errors- failed payments, the server being down, etc. All of these can lead to the startup missing its deadline or producing poor quality of work for their client. Under these circumstances, if the startup gets sued by its client, the errors and omissions insurance will prove to be useful.

Other situations during which this insurance will be helpful for a startup is if it is sued for copyright violation, infringement of intellectual property rights, plagiarism, etc. It is advisable that startup purchases this insurance either when it is preparing to launch a new product or its products are already in the market.

Cyber Liability Insurance

Cyber Liability Insurance helps compensate for the losses that are generated due to cybercrime, hacking, stealing of protected data, etc. Considering that most of the businesses today use the internet for its business and maintain important databases, it is beneficial for businesses, including startups to purchase cyber liability insurance.

Cyber liability insurance can be useful for startups in some of the following circumstances:

  • If its database gets hacked and sensitive information gets leaked, the startup can be sued for breach of privacy and freedom of information violation.
  • The startup’s digital devices such as laptops or computers can get stolen and important information stored in them can be accessed by scrupulous elements.
  • A competing startup can sue it for libel or slander based on the content that is published on the startup’s website, or in any other public domain.

There are certain differences between cyber liability insurance and errors and omissions insurance. Although Errors and Omissions Insurance does cover cyber-related costs, but it mostly pays for the legal and settlement costs. On the other hand, cyber liability insurance would pay for all the losses that a company has suffered after a cyber-attack has taken place. Some of these costs include expenses related to the investigation of the cyber-crime, repairing of the affected electronic devices, restoration costs of the data that has been hacked, etc.

Directors’ and Officers’ Liability Insurance

The profits or losses, the goodwill or the ignominy- the responsibility for all that a business acquires ultimately lie with its executive heads. While they receive praise and admiration for the success of their business, at the same time, they face criticism if the business fails. Certain failures can be fatal for a business since it can lead to its directors and officers being sued. In such a situation, Directors’ and Officers’ Liability Insurance can be very helpful.

Directors’ and Officers’ Liability Insurance compensates the costs borne by the directors and officers of a company for their failures. These costs are borne by them in the managerial capacity of their business. Some of the claims made by aggrieved parties under Directors’ and Officers’ liability include the following:

  • Lack of action by the business director against complaints of sexual harassment
  • Bankruptcy cases which are a result of the inefficient running of the business by its director.
  • Misrepresentation of facts especially those related to transactions and finances by the business director.
  • Misuse and misappropriation of funds by the director of the business.
  • Claims pertaining to the usage of human resources in a business. This relates to employing a new worker as well as the termination of a worker. Claims can be made regarding wrongful termination against the director. In that case, he/she will have to take recourse of the Directors’ and Officers’ Liability Insurance.

It is useful for startups to purchase a Directors’ and Officers’ Liability Insurance when they have received new finances for their company. The investors will ask for a Directors’ and Officers’ Liability Insurance cover since they can be sued for any mismanagement on the part of the startup.

Insurance policies pertaining to employees

Although minuscule, most startups will have a certain number of employees working for them. Hence, it can consider purchasing group personal accident insurance and group health insurance.

Group Personal Accident Insurance will help pay for the costs of an accident, disability or death of an employee. In case of death, the insurance benefits will go to the dependents of the employee. Group Health Insurance will help pay for the medical costs of an employee of a startup in case he/she suffers from an illness or faces a grievous injury.

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