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Jeremy Gottschalk, founder of Marketplace Risk and expert in risk management, trust & safety, and legal strategy for marketplace startups.
For a marketplace founder who is still early on, insurance can be a tricky prospect. Like most people, experience with insurance until this point often begins and ends with personal insurance, such as a rental agreement, car, or home.
Whether it's the cost, the nitty-gritty detail, or the financial outlay for benefits that may seem less than tangible, it can be tempting to go to your local broker and choose a one-size-fits-all package before pushing the insurance issue to the back of your mind.
However, to successfully operate and scale a start-up, it's essential to have the right insurance coverage. A simple claim has brought down too many startups that the right insurance program would have covered.
But that raises the question - “How do I select the right insurance for my marketplace?”
The answer is simply to put in the legwork to find the right broker who understands marketplaces, platforms and the sharing economy (for the purposes of this post, I will refer to "marketplaces"). From there, you need to understand how your policy works and what your obligations are when an incident occurs that causes you to make a claim.
As an executive team or founder, it's vital to understand your insurance program and how you can use it. And for this reason, the best place to start is with brokers and underwriters.
Getting Started
If you’re familiar with Marketplace Risk, you're likely to have encountered Aon, Apollo/ibott, Embroker, Intact Insurance, Mason AHT, Willis Towers Watson and Y-Risk, as a few experienced insurance brokers and underwriters that sponsor some of Marketplace Risk's programs, events and resources.
There is a reason why we work closely with these companies - they understand marketplaces. Regardless of which insurance broker or underwriter you work with, it is imperative that they know your business, but also how marketplaces, platforms and the sharing economy work to ensure that you are properly covered. This starts with getting to know the brokers.
Spend time with your broker and make sure they understand the ins and outs of your specific market. Their understanding will influence what they communicate with underwriters, and in turn, the resulting insurance program (and the corresponding premium). Don't be afraid to question their experience with marketplaces to feel comfortable with them.
Beyond that, explore all types of insurance with your broker. Many business owners are familiar with Commercial General Liability (CGL), but as a digital company, you should also consider cyber liability. What about liability for errors and omissions? Directors and officers insurance? These are all important considerations, so it's critical to educate yourself, and your broker should be your primary resource.
Make sure you ask them questions about all types of insurance, and which ones are suitable for your business at your stage. As a result, you should understand how claims are handled under each policy and what types of claims each policy covers (or excludes). This knowledge is essential to get a clear picture of your insurance program and how each component works.
Deductible vs Retention
Marketplaces are uniquely positioned from a legal point of view. First, the terms of use/service function as contracts between marketplaces and their users to limit liability, among other things. Second, Section 230 of the Communications Decency Act is a federal law interpreted to protect marketplaces from liability for their users' behavior. Although this is an oversimplification of both legal concepts, the takeaway is that marketplaces have strong defenses against many claims.
Let's say there's an incident, and you get a letter of demand from a lawyer claiming the incident was the fault of the marketplace, or you're directly sued. At this point, most policies, require you to notify the insurance company and make a claim on your insurance. From there, the insurance company will assign and/or hire lawyers and begin to defend against the claim. Although you will participate in the defense, the insurance company controls the process, including whether you want to settle or go to trial (and almost no insurance company wants to go to court despite great defenses).
In general, there is a deductible under your insurance policy for which you are responsible, and then the insurance company pays the rest up to the limit. In the marketplace context, I encourage executives to also explore a model of self-insured retention (SIR). Unlike a deductible that could be a nominal amount relative to coverage (the average deductible for a million dollar limit on a CGL could be $25,000, for example), an SIR makes the marketplace responsible for a much higher amount ($100,000 or $250,000, for example) before the insurance company responds.
This may seem counterintuitive, but the advantage of a SIR is that you as a marketplace have more control over claims and can dictate how to respond to the incident up to the amount of the SIR. This is important, given the strong defenses available to marketplaces - you may not want to settle despite the insistence of the insurance company. You also get more control over the law firms and lawyers you use, and it allows you to defend yourself in your own way, rather than giving the insurance company more control in a traditional deductible scenario. In the long run, this could save you from high premiums and insurance refusals by skittish underwriters.
Claims and Legal Counsel
The last aspect of insurance is inevitability. If you hit scale and do everything right, your marketplace will eventually experience a claim. Consider it a sign of success (to some extent).
I urge marketplaces, whether they choose a deductible or SIR, to negotiate with your preferred law firms to serve as counsel in the event of a claim. Ideally, you should do this before binding coverage, as you lose all your negotiating leverage if you wait until an actual claim is made. I also suggest you agree on how claims are handled - whether you can respond to the demand or whether the insurance company will respond. I've found that when a marketplace responds with its defenses and an explanation of the law (see above), the result is more favorable. Remember that if you respond on your own behalf, you need an internal lawyer who understands the law and the marketplace well.
Propose the insurance company uses your preferred law firm for legal advice, the advantage being that you have already established this relationship and built trust. Remember - it's important to work with companies that understand your marketplace and how it works. Handling and managing a claim can be so much smoother and more efficient.
In many cases, insurance companies will provide you with a list of pre-approved law firms. If you cannot get your own approval, try to interview some of these law firms to get a background on them. Investigate whether they understand marketplaces, what other marketplaces they represent, and certainly their familiarity with the defenses described above.
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