Emerging tech companies face many uncertainties. On the one hand, it’s an exciting environment with eager investors and an expanding market receptive to new high-tech solutions. But there are also risks from cyber disruption, potential product liability claims, and less than trustworthy vendors. Don’t get caught without adequate protections.
Indemnification agreements. Carefully drafted indemnity provisions in your contracts with vendors and other third parties, including suppliers and large customers, can go a long way to protecting your business against various risks that are out of your control. When a claim arises, you will want the indemnitor to step in to address issues as seamlessly as possible. Close attention to the details of your agreements is critical. Don’t rely on standard form provisions that are not tailored to your business. If a dispute arises, you will want to make sure, for example, that you are not bogged down by unfavorable choice-of-law or dispute-resolution provisions. These should be addressed in advance. Keep in mind that an indemnity agreement is only as good as the indemnitor who signs it. If the indemnitor is insolvent or unwilling to step up, then your business is on its own. Insurance is the only way to provide that additional security.
Insurance provisions. Indemnity provisions in your agreements can and should be supplemented by an insurance provision that requires the other party to maintain minimal levels of insurance and to name your business as an additional insured. This can provide an additional layer of protection. But, insurance provisions can represent a false sense of security, so beware. Unless you actually request a copy of the other party’s insurance policy and review it in advance, there is no way to know how strong the coverage will be. Many insurance companies severely limit their obligations when it comes to additional insureds under their policies and may include exclusions or other limitations that make coverage as an additional insured for future claims unlikely. Relying upon a certificate of insurance alone without seeing the underlying policy can also be risky, even if the certificate says that your company is an additional insured. Generally, the insurance policy alone controls. If you can, ask for the policy or endorsement that is referenced in the certificate. That is the only way to make sure you are protected.
Products/completed operations insurance. Many companies rely on their brokers to obtain a basic insurance package to address business risks. Depending on what stage your business is in, you might not be able to afford anything but the most basic insurance, with modest limits at affordable premiums. But be aware that many standard liability policies specifically exclude coverage for product claims. If you are selling a product or a component part incorporated into another’s product, you are at risk for product claims. Your liability insurance may actually provide no protection at all. Review it carefully so that you can make an informed decision about that risk and enhance your coverage as necessary at the time of renewal.
Specialized insurance. Your basic business insurance generally includes property insurance, general liability coverage, auto liability coverage, and certain employment-related insurance, like workers comp. Directors and officers (D&O) insurance is also a must-have, and for private companies, the coverage extends to your business as well as your Ds and Os. As your company grows, and as it specializes in certain areas, other lines of insurance can provide additional security. These include cyber coverage, media coverage, technology errors and omissions coverage, and more robust forms of employment practices insurance.
Your business model is unique. That is what caught the eye of investors and gives you an edge in the marketplace. You may also need to be creative and think outside the box in addressing potential risks. That off-the-shelf, cookie-cutter insurance package suggested by your broker may not actually capture your company’s unique risks.