Getting Business Insurance for On-Demand Startups

Update: We’ve released a new whitepaper examining the Sharing Economy industry. We dive into the insurance landscape, legal climate and how to approach risk management for companies in this sector. You can download the report here!

The on-demand economy is ever-growing and we work with new startups in the space on a daily basis.  We’ve previously discussed the risk profile of on-demand services companies and how insurance can help, but here’s what you need to know about actually getting business insurance for on-demand startups.

1. Technology is the tip of the iceberg

One of the most common things we hear is something along the lines of: “we’re just a tech platform and a mere conduit to connect our users…in no way do we perform any of the services on the app.”

While that’s a good thing and can ultimately limit the company’s damages in a claim situation, it doesn’t mean that the company can be underwritten just like any other mobile or web app.  It comes down to this: it’s not necessarily what you do in practice, but how you’re perceived by the outside world.

When a user finds a place to stay on Airbnb, they’re clearly dealing with an independent 3rd party.  However, they’ve dealt with that party solely because of the amazing branded experience they’ve had on Airbnb’s platform.  If something should go wrong, do you think a lawyer would leave Airbnb out of the suit because they’re a “mere conduit?”  The case is even more compelling as the 3rd party distinction weakens and the branding strengthens (think Uber or Postmates).

In the dynamic landscape of on-demand startups, it’s crucial to foresee potential entanglements in service provider-related legal disputes. Even with meticulously crafted contracts, grappling with legal fees remains inevitable. That’s where the significance of “insurance on demand” comes into play. Underwriters assess the risks associated with service providers during the policy underwriting process, making a generic “tech company” insurance policy insufficient for comprehensive coverage.

For this reason, underwriting can take a bit longer and premiums may be higher than your officemates that are building a B2B SaaS product or running a web design shop.

2. The 1099 conundrum

The on-demand economy is also called the “1099 economy,” referring to the use of 1099 independent contractors (“ICs”) as the service providers on the platforms.  Traditionally (and in many industries today), independent contractors were separate businesses or consultants that often carried their own insurance of which they would have to show proof to the general contractor that hired them.   The on-demand services space has turned this practice on its head, giving rise to opportunity, criticism, and new legal challenges all at once.

Insurance companies look at ICs through a traditional lens and will usually quote coverage based on the condition that the insured requires proof of coverage from ICs before working with them (i.e. adding them to the platform).  Generally, on-demand startups will not want to enforce this requirement because it creates some on-boarding friction and may stifle adoption by prospective ICs.  This leads to a bit of a stand-off between old-world risk mitigation and the startup “move fast and break things” mentality.

Fortunately for startups in need of cyber insurance, these prerequisites can be eased or even waived altogether. However, this concession comes at a cost – quite literally. While underwriters might be willing to waive the proof of insurance requirements, they offset this by categorizing independent contractors as employees for premium calculation purposes. This brings us back to our initial point: your customers are largely indifferent to whether your service providers are 1099 contractors or full-fledged employees. So, the question arises, why should underwriters be concerned?

3. Blended risks

One other important nuance to the on-demand economy turns on the issue illuminated by our first two points: there are a lot of blurred lines in the space.  The distinctions between contractor and employee, service provider and conduit, and tech product and tangible service are muddled.    It is because of this and the uncertainty it brings that underwriters will often want to package coverage together.  For example, one underwriter might be willing to offer general liability insurance but only on the condition that the insured shows proof of errors and omissions insurance as well.

To sum it up, the on-demand economy is still young and insurance carriers are still working to adjust to it.  Combine this with legal uncertainty and you run into a bit longer underwriting cycles and higher premiums than more “traditional” tech companies.  Getting business insurance for on-demand startups may be a bit more involved than for other companies, but it’s doable.  It’s important to get the ball rolling early and build the cost of insurance into the model as the company grows.