Insurance Due Diligence for UK Startups: What Investors Expect and Coverage Gaps

Insurance Due Diligence: Meeting UK Investor Requirements

Your funding round is gaining momentum. The term sheet is nearly ready, and conversations with investors are positive. Then, the due diligence checklist arrives, and a section on insurance requirements sends a wave of uncertainty through the founding team. For many UK startups, insurance is an operational afterthought, managed by a founder or office manager with limited bandwidth. This reactive approach creates significant risk, not just for the business, but for the funding round itself.

Failing to prepare can lead to last-minute delays, strained investor relationships, and even jeopardise the closing of a round. Understanding what investors expect, why they expect it, and how to prepare is no longer a peripheral task. It is a core part of securing capital and scaling responsibly.

The Investor's 'Big Three' Policies: What's Actually Non-Negotiable?

When UK investors review a startup's risk profile, they are not just looking for a safety net. They are looking for signals of operational maturity and good corporate governance. Three core policies consistently emerge as the baseline for investor due diligence, forming the foundation of a startup's insurance programme. The reality for most Pre-Seed to Series B startups is more pragmatic: investors want to see adequate, proportional coverage, not overly expensive 'gold-plated' policies that drain precious runway.

1. Directors & Officers (D&O) Insurance

Directors & Officers (D&O) insurance protects the personal assets of a company's leadership from legal claims alleging wrongful acts in their managerial capacity. This is not about protecting the company's bank account, but the founders' and board members' own finances. Investors, who often take a board seat as part of the deal, see this as an absolute essential. They will not put their personal assets at risk to join your board.

A 2023 survey by a major UK broker found that 85% of institutional VCs require D&O coverage to be in place before a Series A term sheet is signed. Wrongful acts can include breach of duty, misrepresentation to shareholders, or poor employment practices leading to a claim. For a UK startup, typical coverage limits scale with funding:

• Seed Stage: £1M is a common starting point.
• Series A/B: Coverage increases to £2M to £5M as the board formalises and the company's value grows.

2. Professional Indemnity (PI) Insurance

Known as Errors & Omissions (E&O) in the US, Professional Indemnity insurance is vital for any startup providing a service, software, or specialist advice. It covers the legal costs and damages if a client loses money due to your negligence, errors, or omissions. For technology and service-based startups, this is arguably the most critical operational policy.

Consider a SaaS company with a bug that causes customer data loss, a professional services firm whose advice leads to a financial downturn for a client, or a Deeptech platform that provides faulty analysis. Any of these scenarios could trigger a significant PI claim. Investors look for PI coverage as proof that a single client dispute will not bankrupt the company. The required limits are directly tied to your customer base and contract values:

• Early Stage (with customers): £1M to £2M is a standard expectation.
• Growth Stage (Series A/B): As you land larger enterprise clients, who may contractually require it, this should increase to £5M or more.

3. Cyber Liability Insurance

Cyber insurance covers the financial fallout from a data breach or cyberattack. This includes first-party costs like forensic investigation, business interruption, and ransomware payments, as well as third-party costs like customer notification, credit monitoring, and legal defence. In the UK and Europe, its importance is amplified by strict regulation.

The General Data Protection Regulation (GDPR) is a key driver for cyber insurance due to the potential for significant fines. For any startup handling customer or user data, from an E-commerce store built on Shopify to a B2B SaaS platform, this coverage is non-negotiable. Investors need to know that a data breach, an increasingly common event, will be a manageable crisis, not an extinction-level one. Coverage expectations are often similar to D&O:

• Seed Stage: £1M is a typical starting point.
• Series A/B: As your data footprint and revenue grow, expect to need £2M to £5M in coverage.

The Due Diligence Playbook: Avoiding Last-Minute Funding Delays

One of the most common and avoidable pitfalls in a funding round is a last-minute scramble for insurance. A scenario we repeatedly see is a founder receiving a due diligence list and realising their coverage is non-existent, inadequate, or poorly documented. This triggers a frantic rush that can easily delay closing. The insurance procurement process can take 2-4 weeks, a timeline that is incompatible with the final, fast-paced days of a fundraise.

Building a proactive playbook starts with acknowledging this timeline and engaging with an expert early. A startup-specialist insurance broker is invaluable. Unlike a generic broker, a specialist understands the specific risks of a SaaS, Biotech, or Deeptech company and has relationships with insurers who underwrite those risks. They can help you navigate the market efficiently and avoid policies with critical exclusions.

Consider a SaaS startup providing a data analytics platform. During late-stage due diligence for their Series A, the investor's legal team reviewed their PI policy. They discovered an exclusion for claims arising from 'financial modelling advice', a core feature of the startup's product. The policy was effectively useless. Funding was paused until a new, appropriate policy could be put in place, delaying the close by three weeks and causing considerable stress.

To avoid this, your startup insurance checklist and process should include these steps:

1. Engage a Specialist Broker Early: Start conversations with a broker who focuses on high-growth tech companies at least a month before you anticipate receiving a term sheet. Ask them about their experience with businesses at your stage and in your sector.
2. Understand Key Policy Terms: Work with your broker to understand the 'retroactive date', which specifies how far back in time a policy will cover your past work. For most startups, this should be set to the company's incorporation date to cover all prior activities. Scrutinise exclusions carefully to ensure they do not negate coverage for your core business.
3. Prepare Your Underwriting Submission: The application process is detailed. Insurers will need information on your corporate structure, financials (often pulled from your accounting software like Xero), governance procedures, and technical architecture. Having this information ready will speed up the process significantly.
4. Secure and Organise Proof of Coverage: Once a policy is bound, you will receive a certificate of insurance and a full policy schedule. These are the documents your investor's legal team will need for their checklist. Ensure they are clearly labelled and readily available in your virtual data room.

Beyond the Basics: Common Insurance Gaps in UK Startups

Securing the 'Big Three' is the first step, but investors are also looking for a deeper understanding of risk management. Several common gaps can appear during due diligence, signalling operational immaturity.

Underinsurance and Proportionality

Choosing the absolute minimum coverage limit to save money can be a false economy. If a claim arises, legal and settlement costs can quickly exhaust a £1M limit, leaving the company exposed. Investors want to see limits that are proportional to your largest contracts, your data exposure, and the overall value of the business. A good broker will help you model potential loss scenarios to justify your chosen limits.

Ignoring Contractual Obligations

As startups begin to sign larger commercial agreements, particularly with enterprise clients, they will find specific insurance requirements written into the contracts. These may demand higher PI or Cyber limits than you currently hold. Failing to meet these contractual obligations is a compliance breach and a red flag for investors, who will review key customer agreements during legal due diligence.

Forgetting Key Person or Employers' Liability

While not always on the primary investor checklist, other policies demonstrate foresight. Employers’ Liability (EL) is a legal requirement in the UK as soon as you hire your first employee, carrying a minimum cover of £5M. Key Person insurance, which provides a financial payout if a critical founder is unable to work, can also be a valuable addition for very early-stage companies heavily reliant on one or two individuals.

Strategic Takeaways for a Smooth Due Diligence Process

Navigating the insurance requirements for UK startup investors is less about ticking a box and more about demonstrating foresight and operational rigour. It is a tangible signal to potential partners that you are building a resilient, well-governed company prepared for the challenges of scaling.

What founders find actually works is viewing insurance not as a cost centre, but as a strategic enabler. The goal is to secure coverage that is proportional to your current stage and risk profile. A pre-revenue Deeptech startup does not need the same PI policy as a growing E-commerce business with thousands of customers. A specialist broker is essential to finding this balance, ensuring you are protected without overspending your limited runway.

At the seed stage, the focus is on establishing a foundational layer of protection with the 'Big Three': D&O, PI, and Cyber. As you approach Series A and B, the conversation shifts to increasing those limits in line with your growing revenue, headcount, and enterprise contractual obligations. This staged approach protects your capital while satisfying investor expectations.

Ultimately, the process should be integrated into your funding preparation. Just as you prepare your financial model and data room, you should proactively manage your insurance review. By starting the process 2-4 weeks before you expect to need the documents, you transform a potential last-minute crisis into a smooth, professional step on the path to closing your round. For broader guidance on preparing for scrutiny, review the main investor due diligence hub.

Frequently Asked Questions

Q: How much should a UK startup budget for investor-required insurance?
A: Costs vary widely by sector, but as a rough guide, a Seed-stage tech startup can expect to pay between £3,000 and £8,000 annually for a foundational package covering D&O, PI, and Cyber with £1M limits. This cost will increase with higher limits, revenue, and headcount as you scale.

Q: What is the latest I can leave arranging insurance before a funding round?
A: You should start the process at least four weeks before you expect to close the round. The underwriting process requires detailed information and can take time. Leaving it to the last minute is a common cause of funding delays, as investors will not wire funds until proof of coverage is in place.

Q: Is Employers’ Liability (EL) insurance part of investor due diligence?
A: While D&O, PI, and Cyber are the primary focus for VCs, EL is a legal requirement in the UK for any company with employees. Investors will expect you to be legally compliant, so having EL insurance in place is a basic sign of good governance, even if it is not on their main checklist.

Q: Can my D&O policy cover disputes with investors?
A: Yes, this is a core function of D&O insurance. If an investor were to bring a claim against the directors for mismanagement or misrepresentation, the D&O policy would typically respond to cover the legal defence costs for the individuals named in the suit. This is a key reason why VCs insist on it.