When you're launching a startup, every dollar counts. Between product development, hiring, and marketing, insurance might feel like just another expense you'd rather skip. But here's the reality: some insurance isn't optional—it's required by law. And other types, while technically voluntary, might be mandatory if you want to land clients, sign a lease, or secure funding.
Understanding the difference between legally required insurance, contractually required coverage, and genuinely optional protection helps you budget smarter and avoid costly surprises. Let's break down what startups actually have to pay for versus what's a strategic choice.
Legally Required vs. Contractually Required Insurance
First, let's distinguish between two very different types of 'required' insurance. Legal requirements come from government regulations—ignore them and you face fines, penalties, or worse. Contractual requirements come from business relationships—ignore them and you lose the deal.
Workers' compensation insurance is legally required in almost every state once you hire your first employee. The specifics vary by location, but the principle is universal: if someone works for you and gets injured on the job, workers' comp covers their medical bills and lost wages. Operating without it can result in serious penalties, including personal liability for workplace injuries.
Commercial auto insurance is legally required if your startup owns or leases vehicles used for business purposes. Your personal auto policy won't cover accidents that happen while an employee is making deliveries or driving to client meetings. Every state mandates minimum liability coverage for business vehicles.
Beyond legal mandates, you'll encounter contractual insurance requirements constantly. Clients—especially enterprise customers—routinely require vendors to carry general liability and professional liability insurance before signing contracts. Landlords typically require tenants to have commercial property insurance and sometimes general liability coverage. Investors and banks may require certain coverage as a condition of funding. These aren't laws, but they're non-negotiable if you want the business relationship.
Certificates of Insurance and the Procurement Process
When a client or landlord requires insurance, they don't just take your word for it. They ask for a Certificate of Insurance, commonly called a COI. This is a one-page document issued by your insurance provider that proves you have active coverage and lists the key policy details: coverage types, policy limits, effective dates, and the certificate holder's name.
COIs are standard in B2B transactions. If you're bidding on contracts, expect to provide one before the deal closes. Many startups discover they need insurance for the first time when a promising client sends over a vendor questionnaire asking for proof of coverage.
The procurement process at larger companies often includes specific insurance requirements written into contracts. You might see language requiring $1 million in general liability coverage, $1 million in professional liability, or specific endorsements naming the client as an additional insured. These aren't arbitrary numbers—they reflect the client's risk management standards.
Getting a COI is straightforward once you have coverage. Your insurance provider can generate one quickly, often within 24 hours. The key is having the right policies in place before you need them. Scrambling to get insured after you've already won the contract creates delays that can frustrate new clients.
What Insurance Is Actually Optional for Startups?
If you're a solo founder with no employees, no company vehicles, no office lease, and no clients requiring coverage, technically very little insurance is legally mandated. But 'optional' doesn't mean 'unnecessary.'
General liability insurance protects against third-party claims of bodily injury or property damage. If a client visits your co-working space and trips over your equipment, or if your product somehow damages a customer's property, general liability responds. It's not required by law, but it's foundational coverage that most startups should carry.
Professional liability insurance (also called errors and omissions or E&O) covers claims arising from your professional services or advice. If a client alleges that your software caused them financial harm or your consulting advice led them astray, this policy pays for legal defense and settlements. Tech startups, consultancies, and any service-based business should consider this coverage essential even when it's not contractually required.
Cyber liability insurance covers data breaches, ransomware attacks, and other digital threats. If your startup handles customer data—and most do—a breach can be catastrophic. This coverage is increasingly requested by clients and is smart protection regardless.
- General liability: Covers third-party injury and property damage claims
- Professional liability (E&O): Covers claims from your professional services or products
- Cyber liability: Covers data breaches and cyber incidents
- Business property: Covers your equipment, inventory, and office contents
- Business interruption: Covers lost income if you can't operate due to a covered event
Smart Starter Coverage for Early-Stage Startups
You don't need to buy every policy on day one. The smartest approach is matching your coverage to your actual risk profile and scaling up as you grow.
For most early-stage startups, a sensible starter package includes general liability and professional liability coverage. These two policies address the most common risks you'll face and satisfy most client and landlord requirements. Bundling them through a Business Owner's Policy (BOP) often costs less than buying them separately.
Add workers' compensation as soon as you hire—don't wait until you have multiple employees. Add commercial auto if you acquire business vehicles. Add cyber liability once you're handling meaningful amounts of customer data or if clients start asking for it.
The goal isn't to over-insure your startup when resources are tight. It's to cover the risks that could actually sink your business while meeting the requirements that let you operate and grow. As your startup scales, your insurance should scale with it.
Find the Right Coverage for Your Startup
Not sure what coverage your startup actually needs? Anchor Insurance specializes in helping founders navigate required and recommended coverage without overpaying. Get a quote in minutes and see exactly what protection makes sense for your stage and industry.