March 17, 2015 | 5-minute read (862 words)
This guest post by Carl Niedbala originally appeared on Orrick's Total Access blog.
Buying insurance can be a daunting task, particularly for venture-backed startups. The market for relevant insurance products tends to be fragmented and a finding a broker who understands tech can be tough. Sometimes, just getting the ball rolling can be confusing.
With that in mind, here’s an introduction to purchasing insurance:
Do: Vet Your Broker
While there are some generalists out there, most brokers earn success by mastering an industry. Make sure that your broker fully understands your business model and where the inherent risks to your company lie. A good broker will look at your company from all angles and leave no stone unturned. How do you make this choice? Same as any business partner, vendor, or service provider.
Ask your investors and fellow founders for their opinions and recommendations. Do research on potential broker-partners and get a feel for their philosophy and approach. Engage in a dialogue with your broker to verify what you researched. Check in with current clients (if possible) to see what their experience has been with the brokerage. Make sure you understand the application process and that you’re on board with the broker’s methods.
Do: Ask Questions
Make sure you feel good about this partnership because having to explain and re-explain your business to every broker you work with just causes more headaches as the company grows. You want your broker to have your back and to be excited about your business and its roadmap.
Once you’ve found your insurance broker, don’t hesitate to dig into the coverage and ask questions. Insurance should be viewed as an investment rather than just another cost and your broker should know this. Make sure that you’re making the right investment. You want the proper coverage for your risk profile, flexibility to modify coverage as your company changes, and scalability to layer on coverage as your company grows.
Don't: Go to Multiple Brokers (at first…)
The usual “shopping around” method doesn’t really work in your favor when buying business insurance. Here’s why:
When a broker approaches an insurance company on your behalf, s/he becomes the exclusive “broker of record” who can work with that carrier. Only one broker can talk to any one carrier at any given time. This gives the broker the best chance to make his/her case on your behalf without any distractions.
When you approach multiple brokers at the same time, they’ll almost certainly go to the same markets (those that are best for your specific company) if they’re doing it right. Depending on the order in which you approached each broker, each will be blocked at certain markets because another has already approached them. The process is now jammed up and you’re pushed into choosing your preferred broker as you should have done in the first place.
Vetting your broker and sticking with him/her makes life so much easier. Make sure that you go with a broker who has strong underwriter relationships with the insurance carriers most relevant to your company. The application can be annoying and you don’t want to do it more than once. The best broker for you will leverage the right underwriters at the right carriers the first time, saving you valuable time and effort.
If your broker strikes out on finding the right policy, now it’s time to approach another broker.
Pro Tip: Make sure you ask your previous broker for all the applications submitted on your behalf as well as a list of carriers who declined to present a proposal. This will expedite the process moving forward.
Don't: Withhold Information
Underwriters require quite a bit of information to create a coverage proposal. They’re essentially extending you a multimillion dollar line of credit for when things go wrong. This is particularly true for policies vital to venture-backed companies, such as technology errors or omissions insurance, cyber liability insurance, or directors and officers insurance.
You’ll need to submit things like financial statements, sample customer contracts, written HR practices, and investor decks. Information is king; you want to give your broker as much ammunition as possible to argue in your favor with the underwriters regarding your risk profile and annual premiums. In any case, proceeding with weak/incomplete information will just lead to additional underwriter requests.
To avoid headaches, make it a goal to try to answer all underwriter questions in one shot to cut down on the time it takes to get a formal proposal.
Hopefully these pointers will help make your insurance purchasing process as stress-free as possible!
Do you need help identifying gaps in your financial picture? Tell us about them in the comments section below or contact Early Growth Financial Services for a free 30-minute financial consultation.
Carl Niedbala is the COO and co-Founder of Founder Shield, a boutique commercial insurance brokerage that takes the stress out of getting insurance for venture-backed companies. You can connect with Carl at @carlniedbala.