Management Liability Insurance for Startups: How is it Different?
Any business with a management or leadership team needs management liability insurance, and startups are no exception. However, startup companies often face challenges in getting the protection they need. In this blog, we’ll explain what management liability insurance is, why it can be difficult for startups to acquire, and how and why Boost built an award-winning management liability product specifically for startups.
What is Management Liability Insurance?
“Management liability insurance” is not a single insurance coverage. Instead, it’s a collection of several different coverages designed to protect a company and its managers from potential legal costs, as well as costs related to mistakes, mismanagement, and disputes. Some insurance providers offer these coverages separately, while others sell them together as a management liability package.
The three most common coverages included in management liability insurance are:
Directors and Officers (D&O) insurance
Employment Practices Liability (EPL) insurance
All three coverages protect against the cost of lawsuits against the company, meaning that if the company is sued, the insurance will cover legal fees, settlements, and other related costs. Each covers a different type of suit.
1. What is Directors and Officers (D&O) Insurance?
Directors and Officers insurance is a type of liability insurance for a business’s senior management (hence the “directors and officers” in the name), in case they are sued for something related to their duties managing the company. This coverage frequently applies to both personal lawsuits against the directors and officers, and to lawsuits against the company related to their actions.
2. What is Employment Practices Liability (EPL) Insurance?
Employment Practices Liability insurance protects a company from the cost of being sued for things related to hiring or personnel practices. This can include lawsuits for things like wrongful termination, discrimination, harassment, and other employment-related issues.
3. What is Fiduciary Insurance?
Fiduciary insurance protects the company from the cost of lawsuits related to mismanagement of the company benefits plan. This can include anything from wrongfully denying benefits to making poor choices for the company’s 401(k) plan investment.
Some management liability packages may also include a type of crime insurance that covers kidnapping for ransom and other specific crimes against a company’s senior management. This differs from the three coverages discussed above as it is not aimed at protecting against lawsuits.
Why is It Hard for Startups to Get Management Liability Insurance?
While the protections that management liability insurance provides are important for many businesses, it can be difficult for startups to access the coverages they need. Many of the management liability products currently on the market were designed for much larger businesses, which is reflected in their risk assessment methods.
For these products, underwriting decisions consider factors like how long the company has been in business, how many employees they have, and their revenue numbers. This can be a problem for startups, since they often have little or no revenue and relatively limited business history. Often, this results in startups being flagged as very high risk - or being denied coverage altogether. Even for startups that are approved for coverage, the high-risk pricing means many can’t afford to buy the policy they’re offered.
Another challenge for startups can be the way that management liability insurance is sold. Many insurers offer the key coverages separately, with little guidance on how they fit together or what a company needs to buy. For young companies that lack insurance expertise, it can be hard to know which coverages they should even apply for.
Startup Management Liability: The Opportunity for Insurtechs
For insurtechs and other businesses that cater to startups, this represents a significant business opportunity. Startups are a big market, with tens of thousands of venture-backed companies in the United States. They’re also a well-funded segment: US-based startups raised nearly $200B in venture capital in 2022.
If your business can meet startups’ insurance needs, you’ve got a lot of prospective customers. And the potential is bigger than just revenue. Insurance is sticky, and building relationships with startup companies can lead to bigger commercial insurance opportunities as those startups grow.
To capitalize on these possibilities, insurtechs need to offer a management liability product that can provide startups with the protection they need, at a price they can afford.
Boost’s Management Liability Insurance Product for Startups
Boost can help. Our award-winning, white-label management liability insurance product addresses the biggest barrier, price, by using an alternative dataset to evaluate risk. Instead of traditional metrics like revenue and organizational age, Boost’s proprietary algorithm takes into account a startup’s institutional backing. Potential VC investors examine a company in great detail, including far more information about its business practices than an insurer would be able to access. If a top-tier investor supports a startup, it’s a reasonable indication that that startup is well-run, and reasonably low risk.
This alternate risk assessment allows for rates up to 40% lower than traditional products. The three key coverages - Directors and Officers, Employment Practice Liability, and Fiduciary - could also be offered in a single white-label insurance package, making it easy for startups to access everything they need.
Like all businesses, startups need insurance that can provide protection against possible costs, but traditional products and legacy underwriting frequently lock them out. For insurtechs able to offer a more inclusive management liability insurance product, there’s a large prospective market just waiting to be tapped.
Contact us to learn how you can get started offering management liability to your startup clients.