What is Startup D&O Insurance?
January 26, 2024
In this blog, we’ll cover what D&O insurance is, why it’s necessary for businesses, and how the D&O insurance needs for startups differ from more established companies. Directors and Officers Insurance (D&O) is a type of liability insurance that focuses on protecting a company’s senior management from lawsuits related to carrying out their roles at the business. This can include lawsuits against the company itself, or against individual executives (“directors and officers”). These suits might be filed by employees, vendors, shareholders, or other third parties. If a lawsuit is filed naming one or more directors and officers, a D&O policy ensures that the cost of resolving the suit does not endanger their personal assets. D&O insurance is often included as part of startup management liability insurance packages, but can also be available as a standalone coverage. While specific policy details may vary, D&O insurance typically covers the costs related to resolving the lawsuit. This can include anything from legal fees for defending against the suit to penalties or settlement payments if the suit is lost or settled out of court. Some of the most common lawsuits covered by D&O relate to: Some common exclusions in D&O policies include: This list is not exhaustive, and there can be variation in what individual products do or do not cover. If a business is large enough to have a management team, then D&O insurance is a must-have. There are two big reasons for this: risk reduction, and raising money. The first reason is pretty self-evident: buying insurance for a specific risk reduces the chances that the risk will negatively impact the business. In this case, the risk is that a person or business entity might file a lawsuit alleging misdeeds by the management team. Even if the lawsuit were ultimately found to be groundless, defending themselves in court could still cause the targeted person or company to rack up significant legal bills. A D&O insurance policy can recover any losses resulting from a covered lawsuit. The second reason relates especially to businesses looking to raise capital: many investors require a company to have D&O insurance before they’re willing to provide financial backing. Investors want assurance that their funds will be used to grow the business (and their potential returns), not be burned up in possible legal costs. Additionally, investors may require it for their own protection. It’s common for an investor to join the portfolio company’s board, and without D&O insurance their assets could then be at risk in a lawsuit against the company. Just like more established businesses, startup businesses need to have D&O insurance (especially as they prepare to fundraise). However, traditional D&O underwriting guidelines can make it difficult for startups to get the necessary coverage . The biggest obstacle? How traditional D&O products evaluate risk. D&O products designed for large, established companies tend to assess a business’s risk based on factors like historical revenue, balance sheet quality, number of employees, and how long the company has been in business. This is a problem for startups, which are generally small, recently established, and may not have any revenue yet. Under traditional underwriting guidelines, startups are often flagged as high-risk, making coverage very expensive (if they’re even offered coverage at all). This can lead to startup companies being priced out of D&O policies, or needing to go to the non-admitted market to purchase coverage. While the high-risk assessment might make sense for the kind of company it was designed around - if a company were in business for ten years with hundreds of employees and little to no revenue, it would certainly raise questions about its management - it ignores that startups are a different kind of entity. For young companies still building their products and business, a small team of recent hires and no revenue doesn’t mean the organization is poorly run; it just means it’s new. Startups need D&O insurance products that provide the coverage they need, at a price they can afford. This means products that assess risk differently than traditional D&O aimed at established companies. For example, at Boost we tackled this problem by building a risk assessment algorithm that considers a startup company’s institutional backing. When a VC firm is considering whether to back a startup, the firm has access to a huge amount of information related to the startup’s business and practices - and generally goes through it with a fine-toothed comb. If a startup is included in a top-tier investor’s portfolio, then it’s reasonable to conclude that the startup has a viable business proposition, access to funds and mentorship from the VC management, has a larger potential to succeed - all things that make their risk profile acceptable in a D&O portfolio. This alternate assessment allows us to offer startups significantly lower rates for D&O and similar coverages than traditional insurance products. For businesses that provide commercial insurance, offering D&O insurance geared at startups can be a strong growth opportunity. Providing insurance specially tailored to startups’ needs allows you to build relationships with early-stage businesses that can grow as they do. For example, while a startup might start with D&O, as their business grows they’ll soon need a combined management liability product that includes D&O along with Employment Practices Liability (EPL), Fiduciary Plan Liability, and cyber liability coverages, which will protect the directors, officers, managers and the entity from governance, finance, benefits and management activities. As your startup customers mature into growth-stage companies, their insurance needs are likely to increase even further. Having a business relationship in place positions you for future upsell and cross-sell opportunities.
Ready to add startup D&O insurance to your lineup? Get in touch today to get started. Continue Reading
Management Liability Insurance for Startups: How is it Different?
February 10, 2023
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. “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: 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. 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. 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. 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. 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. 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 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. Continue Reading
Boost Receives New York Approval for First Comprehensive Startup Management Liability Product
August 26, 2021
Our insurtech and embedded distribution partners can now offer fair and affordable D&O, Fiduciary, and EPL coverage to the burgeoning NY startup market on an admitted basis. Last year, we announced the launch of Boost’s Startup Management Liability Insurance Product after several months of R&D and close engagement with the state insurance regulators. Today, we’re thrilled to announce that this innovative product recently received approval from New York authorities to officially make our product the first comprehensive startup-focused management liability offering available in the state’s admitted market. With New York’s approval, the product is now available to all startups and privately owned small businesses in one of the country’s leading innovation hubs - and Boost’s own home state! Boost’s Startup Management Liability Product is live in 20 states, which collectively represent about 90% of venture capital deal volume and with New York’s recent approval, can be offered in almost every startup hotspot in the U.S. including California, New York, Texas, Illinois, Washington, and many more. As always, we are calling on all tech-enabled MGAs, brokers, agents, and embedded distribution platforms that are interested in partnering with Boost Insurance to offer this game-changing product to their startup and small business customers. According to the National Venture Capital Association, over 10,000 U.S.-based startups received venture capital funding in 2020 alone - with total investment in the segment surpassing $160 billion for the year. This fast-growing startup ecosystem now employs an estimated 2.5 million people across the United States and these trends are not slowing down. The startups of today will represent a meaningful portion of the commercial insurance market of tomorrow - and sooner than you may think. All startups need fair and affordable management liability insurance in their early days - it’s typically even required by investors in order for a startup to raise capital. However, the vast majority don't have access to the coverage they need and the startup segment as a whole remains considerably underserved by traditional insurers and their one-size-fits-all insurance products. Startups are traditionally deemed ineligible and denied coverage outright under legacy underwriting guidelines for commercial lines insurance products - largely due to their lack of financial and/or operating history. Even the startups that are deemed eligible for coverage are forced to pay exorbitant premiums because insurers unfairly generalize the segment as a high-risk class of business relative to larger policyholders. “The New York City startup scene represents approximately 15% of venture capital deal volume in the U.S., so Boost receiving approval to offer the only comprehensive startup management liability insurance product in that market opens up a huge opportunity for a wide range of companies that cater to startups. Those companies can now offer Boost's embedded insurance product and expand the value they already drive to their startup clientele - and be 100% sure that they’re receiving the best coverage at the fairest prices.” -- Alex Maffeo, CEO and Founder of Boost Ironically, Boost encountered this problem ourselves in the early days of our operations, so we know the pain. We were barely even able to get a quote for basic Directors & Officers coverage from traditional insurers when we were closing our seed round of financing, despite helping innovators offer better insurance products being a core part of our company’s mission! Nobody is immune to this problem, so we did what any good startup would do – we built a better product ourselves. Our product empowers any company that has startups or small businesses in its customer base to offer the most comprehensive and affordable management liability protection - all through a simple and fully white-labeled digital insurance experience that is embedded directly into their existing workflows and interfaces. Whether you’re an insurtech, an established broker/agent, a venture capital firm, fintech, bank, or technology company that serves startups - you can now provide a differentiated and valuable line of insurance protection to your customers. Boost’s product can easily be integrated as part of your core business or offered as a value-added product and service to enhance the relationship with your customers. Boost’s Startup Management Liability Product is built for privately owned companies with between $0 and $150 million in venture capital or other forms of equity financing and offers: Get Started on the Boost Platform Learn more about Boost’s Startup Management Liability product. Interested in offering this product or any others to your customers? Contact us to become a Boost partner today. Continue Reading
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