Small business insurance and product liability insurance

As you sit at work, watching how the different tasks are performed, it’s not unusual to think of a way in which one particular task might be made easier or safer. If inspiration does strike you, what should you do about it? The first problem is your contract of employment. Most have a standard clause that requires you to hand over the intellectual property rights of anything you develop as an employee.

The only way round this is to give up your job and develop the idea while self-employed. Be very careful to document how and when the work is done. If your ex-employer sees you have a very commercial idea, there could be a claim against you after launch.

The next major problem is the potential product liability claims should customers be injured when using your product. No matter whether you are proposing a launch with expected sales of ten or thousands of units per week, getting the right insurance can be difficult and expensive. Why should this be difficult? It all comes down to an assessment of the risk your product will injure people. That’s why the number of sales is not immediately important. If the risk of claims is high, the premium will also be high. Let’s say, for example, you develop a product to be used by first responders to the scene of an accident. In such situations, people are already injured and it’s entirely possible they will be suing those said to be responsible. If your device is used, it’s equally possible it could be accused of making the initial injuries worse, or of causing new injuries. If insurers believe there’s a good chance your product will be named in legal proceedings, the premium will be high. Remember, when you are dealing with personal injuries, damages can quickly run over $1 million for pain and suffering, loss of earnings and other consequential losses on top of the cost of medical treatment. So, before you approach an insurance broker or insurance companies directly, get advice on the level of risk your product will be involved in litigation. Extensive field testing by independent experts will help.

Now comes the application for insurance. As a startup, you are going to be asked for a full set of accounts and a detailed business plan. This is likely to include a listing of your personal assets. The reason is again simple. If the insurer does not believe you have adequate funding in place, you might cut costs on the raw materials for manufacture or in safety testing. This can directly impact the risk profile. If it’s not clear the business can survive, e.g. the marketing plan appears inadequate, the insurer will not accept the risk and start a policy running if this could expose it to risk for several years to come even though you have gone out of business.

Getting small business insurances can be a real challenge if you are a startup with a new product. You need to get a good business plan, expert reports on the safety of the product and a full set of accounts. Even then, you will have to contact many brokers specializing in small business insurance before you are likely to find affordable cover.

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