All businesses evolve — from startups to corporations. Having the right insurance coverage for each stage of growth helps ensure companies are protected from legal risks and liabilities. Outdated policies can make businesses vulnerable to costly out-of-pocket settlements and can sometimes even lead to financial devastation. It behooves every scalable business to regularly assess risk management strategies and insurance coverage, and to modify them as necessary to avoid legal consequences.
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Make sure your insurance coverage grows with (not behind) your business
When companies expand, they often hire more employees or open additional locations. In other instances, business growth may include the introduction of new services or products. All of these scenarios are cause for reevaluating insurance coverage.
Any time there’s a significant change in a business, it’s likely to accompany a shift in legal and regulatory requirements. Mismatched insurance coverage can expose businesses to financial penalties, personal liability for owners, increased costs from underinsured claims and significant reputational harm.
Changes in workforce dynamics, contractual obligations and ownership structures — such as mergers or acquisitions — are instances in which updating insurance policies is crucial to mitigate legal risks and protect against evolving threats. Regularly updating and aligning insurance coverage with business needs is essential to reduce risks.
Don’t overlook underutilized insurance options to protect your livelihood
Some of the more utilized types of business coverage include commercial auto insurance, general liability, workers’ compensation, umbrella policies and key person interest. Combined, these insurance policies protect businesses from potential legal ramifications by providing tailored coverage for different exposures resulting from accidents, injuries and catastrophic events on the business premises or during operations.
In addition to the insurance policies listed above, scaling businesses can take advantage of several underutilized insurance options to protect from costly legal problems.
• Cyber liability insurance: Startups and small businesses are just as vulnerable to cyberattacks as mid-size enterprises and large corporations. As companies begin their operations they typically aren’t armed with sophisticated cybersecurity, making them more susceptible to breaches. Cyber liability insurance can shield a new venture from severe financial impact and lawsuits. As businesses start to scale and expand, introducing more complex data systems and larger customer bases, cyber liability insurance becomes increasingly important in safeguarding against class-action lawsuits and significant regulatory infractions, such as those mandated by the General Data Protection Regulation (GDPR).
• Professional liability (errors & omissions) insurance: Any company, regardless of size in the professional services realm — from consultants, lawyers, IT service providers and medical professionals — can benefit from professional liability insurance (also referred to as errors & omissions insurance). This form of coverage protects businesses from professional service negligence and financial harm to clients. The greater the size and scope of a company and its services, the more room for error. For example, suppose a consulting firm advises a company on a strategy but doesn’t produce the desired outcome, and a client sues for financial losses. The consulting firm risks losing the lawsuit without the protection of professional liability coverage.
• Employment practices liability insurance (EPLI): EPLI insurance is beneficial for many stages of business growth to guard companies from legal issues surrounding harassment, wrongful termination and discrimination in the workplace. EPLI is particularly advantageous for small businesses — among the most at risk for employment claims. As enterprises expand, EPLI is imperative to defend against multi-million-dollar lawsuits resulting from high-volume employment claims, especially in heavily regulated industries.
• Business interruption insurance: Any time business is interrupted, whether from natural disasters, power outages, supply chain disruptions or other unforeseen issues, they are at risk for loss of income and operating costs — but that’s not all. If companies have unmet contractual obligations to clients, suppliers or creditors, they run the risk of legal disputes and liability. Business interruption insurance mitigates financial losses that could otherwise impair company operations.
• Product liability insurance: One faulty product can lead to a cascade of legal problems, regardless of company size. Product liability insurance protects scaling companies from high-profile litigation, product recalls and class-action lawsuits. A prime example: The nationally acclaimed baby product dynamo Johnson & Johnson faced more than 38,000 product liability lawsuits related to the talc it used in various products, experiencing an $8.9 billion financial loss in 2023. According to sources, the company had not updated its insurance as it scaled, leading to devastating consequences.
• Directors and officers (D&O) insurance: D&O insurance protects the personal assets of business founders and executives from mismanagement and breach of fiduciary responsibility claims. This coverage is of particular value to midsize and large companies with heightened risk of shareholder lawsuits and decision-making or governance-related lawsuits.
Trends in risk exposure and legal pitfalls
From a legal standpoint, cybersecurity threats are — unfortunately — continuing to remain a top risk as companies ramp up the digitization of their operations. As pointed out earlier, cyberattacks place businesses in a precarious place, subjecting them to regulatory fines and considerable costly lawsuits.
The current economic climate has also impacted the risk management landscape, causing companies to be more at risk of legal issues surrounding new tariffs and trade regulations. Regulations in general are forcing businesses to be more vigilant. Noncompliance can lead to serious legal ramifications and expensive sanctions.
Many businesses have their sights on growing concerns regarding the adoption of artificial intelligence (AI) and its associated risk with liability and privacy infractions.
Companies should also remain vigilant in their environmental, social and governance (ESG) risk management strategies. Noncompliance in this arena can lead to costly lawsuits.
Place proactivity at the forefront of all risk management and insurance measures
With the various risks in a complex economic space, businesses need to be proactive in how they implement risk management strategies. Company leaders must remember that mitigating risks is never a one-and-done process. To avoid significant legal repercussions and financial impacts, insurance coverage and risk management strategies must be continuously evaluated and adjusted.
Author: Sam Saks is a partner with Guidant Law, known for his ability to solve complex insurance disputes, including bad faith delay and denials of coverage.
