Managing Risk — Insurance Policies and Program Design

[MUSIC] Welcome to the Bulletproof Your Marketplace podcast, where we break down the strategies, stories, and insights from my book Bulletproof Your Marketplace, one chapter at a time. Whether you're a founder, legal counsel, or trust and safety leader, or anywhere in between, this series is built to help you navigate risk and scale with confidence. In each episode, we'll dig into a chapter of the book, explore the key themes, and give you actionable takeaways to help you make your marketplace safer, stronger, and more sustainable. On this episode, I'm joined by Garrett Johnson, SVP at Marsh. Garrett, thanks for joining me. Thanks for having me. You bet. So to kick things off, can you introduce yourself a little more, talk about your experience and history working with marketplaces and digital platforms? Yeah, happy to. So pretty much 26 years in the commercial insurance industry started out as an underwriter on the carrier side. Spent most of my career first 15 years or so on the financial institution side, doing things such as directors and officers, financial institutions, ENO for banks, asset managers. In 2020, and transitioned over to A on at the time, where they had just launched their digital economy practice. So that division within A on pretty much handles the sharing economy. So I went from handling financial institutions to handling accounts like Uber, Lyft, DoorDash, LimeScooter, etc. Those types of accounts. So from 2018 until current, that's been a space I've been pretty active in from that point. And that what's bringing me to today? Excellent. So in this episode, we're going to talk about the chapter on insurance program and policy design. And one of the things I kind of highlight in the book is this is a little bit of an opaque topic in the sense that most in my experience, most early stage companies, founders, executive teams, obviously they tend to skew a little bit younger and their experience with insurance tends to kind of end at their renters insurance, their homeowners insurance, or their auto insurance. And so I want to kind of dig in a little bit and obviously provide some kind of actionable takeaways for leadership teams as they think about their insurance programs and their policy design. And I guess my first question for you is why do you think this topic is so important for founders and leadership teams right now? Yeah, it's a good point. I think when you get into the commercial insurance space, particularly when you're in the broader sharing economy, oftentimes insurance is a function of managing risk, so protecting the company assets for the inevitable twists and turns out there in the business world. But it's often under looked, it is a compliance and kind of, you know, contracts will often not be signed until certain insurance minimum requirements are met, particularly for founders, those issues become larger, more complicated and more expensive as you scale. So it's, you know, it's a function, you got to manage your risk as a business, you do want to transfer that risk as much as you can, but there's also an element of, you know, you will not get certain contracts with larger players as you scale unless you have certain insurance requirements in play. And then oftentimes the intersection with trust and safety in your branding is very tightly interwoven with how you manage that through your insurance purchase decision. So I want to dig into there a little bit because trust and safety is a pretty recent, what I would call discipline. Obviously, you know, these platforms have not been around for hundreds of years, right? So they're relatively new business model. And within that trust and safety is relatively new. And so I'd love if you could expand on kind of the importance of trust and safety and how that, the interplay with insurance. Yeah, it kind of serves, I'll kind of put it into two buckets. So you have your, I'll put it from like a regulatory bucket and a customer experience bucket. So I'll work on the customer experience piece. So from a customer standpoint, and I'll use some like publicly available examples. So I think a good example that most people are familiar with is like Airbnb's host guarantee product. Essentially, that is a structure that operates, you know, the nuts and bolts of it simply say if you list your property on Airbnb, the host guarantee provides essentially a million dollar property damage coverage for you if the renter kind of trash is your home while you're renting it. That is ultimately a quote unquote guarantee that they offer, but it's backed behind the scenes. There's an insurance structure that kind of funds and makes it all work out. But from the customer experience standpoint, if I own a home that I'm going to put on a house sharing platform, I'm probably going to feel a little safer going with Airbnb than maybe a competitor of theirs that does not have that type of guarantee product. So it's just a good kind of very well-known structure that from a customer experience, it's a function of do you as a platform want to make that customer experience feel safer than your competitors and can you use insurance to kind of structure some of those experiences. On the flip side, when you get to the regulatory side, if we go back in history, like Uber's the easiest one to kind of look through because they were one of really the pioneers in the sharing economy space, obviously disrupting a traditional model within the taxi model. But one thing Uber did is they, the founder, they had a reputation of kind of move fast and break things, right? That was one of their models early on. I think as we've moved through this space over time because they're about 15 years into that model, move fast and break things works great for disruption. It's not really well received at the regulatory level, right? They don't really love that framework. So and again, like, Uber's a great case study because in many ways, the moving fast and break things is why they were able to scale as quickly as they were, but there is a cost to that. And I think still today there's a little bit of a bad taste regulatory kind of residue in the mouth of regulators of disruptive, you know, first movers. There's a resistance. And, you know, so that's that plays into the narrative of how you deal with the regulatory landscape. They often want to see deliberate, thoughtful, careful approaches, which doesn't always marry well with companies that want to disrupt kind of legacy industries. So there's no right or wrong answer there. It's just having an awareness of pick your battles. And if you push hard on one lever, you've just got to accept there's going to be dynamics going the other way on the other lever. Again, no right or wrong. Just awareness, I think, is key on how you approach those two kind of conflicting interests. Right. And I think that what I love about what you just said is that's pretty much the reason that I wrote this book is that while I agree with you 100%, I don't think that they're 100% mutually exclusive. I think that there's probably somewhere in the middle. And I guess not and but the issue is that there are a lot of blind spots that early stage founders and leadership teams are just unaware of. And in many cases, it's just because they don't have the experience through no fault of their own, right? They're the risk takers. That's why we have some pretty cool technology and apps. And, you know, you name it innovations existing because we have younger people who are willing to take risks and with their creativity. So that's exactly I think trying to balance out both the kind of the risk and the growth and all of that. Can moving into a little bit more specific when you're talking about an insurance program and kind of the policy design. And when I talk with when I do talks both about the book and proceeding the book was a boot camp. And so I've talked to hundreds of thousands of hundreds of thousands of operators and founders and leadership teams about these topics. Insurance is where they tend to fall asleep, which is part of the reason why I start with it, because I've got their attention. And the reality is it's so important that they understand that they understand it or at least they're able to kind of issue spot. And so and really understand how insurance really fits into the success of their platform, right? I think it's just one of those things that based on the lack of experience, there's a whole vernacular that I think you got to kind of understand and understand who the players are. And so that's one of the things I tried to do in the book. And then but more specifically, I guess I wanted to run a few of the theme that I tried to hammer home and just get your thoughts on it or your reactions on it as somebody who's been doing this for for quite a long time because and why I included these specific themes was it was new to me. When I went in house and started the legal function, this was I was learning from zero. I knew nothing. I was like everybody else. I had some vague familiarity with auto insurance and renters insurance and homeowners insurance, but that was about the extent of it. So I guess the first thing I want to get your reaction to is this notion that you really need to ensure that your broker understands marketplaces and your specific business model and kind of why that's important. Yeah. And so similar to something as on my mind as we were talking a few minutes ago. So one of the things that resonated in your book with me is this. And I'll I'll put slightly different language to it, but it's the same concept of the insurance terms and conditions are far more negotiable in the commercial space than the personal lines space. And I'll put a caveat there with they are less negotiable when you're a small business. They become more and more negotiable as you scale. But within that context, I cannot underline or emphasize enough the importance of partnering, looking at your insurance broker, and then tangentially your carrier partners you line up with as true partners versus kind of necessary evils or something you just got to check the box and get done and move on to the next thing. And I say that like, I think an easy corollary to that is having a good accountant, right? Like, nobody likes doing their taxes, but ignoring your taxes or not taking the advice of your accountant doesn't necessarily work in your favor, right? The insurance process is very similar where, if you step back and zoom out, the insurance brokerage community and the carrier communities, they're usually one of the people in the room when everything goes wrong. So they are naturally a little bit cautious, but they also have a wealth of knowledge of they see where all the landmines are of your peers. Oftentimes, it depends on the sub-segment, but if you're in, say, last mile delivery and you're more on the startup space, your broker is, to your point of choosing a broker who spent time in this space is crucial. Because if you haven't, you really want a broker that has handled some of your peers. So if it's last mile delivery, if it's ride share, there are a ton of lessons learned, the hard way, that the early adopters have learned, like why not learn those lessons and avoid those pitfalls if you can. I think the other really important role that a broker plays is helping you see beyond the transaction. Because oftentimes, insurance is treated as kind of like an 11th hour. We forgot to do this. We can't get the contract signed until this is done. And everybody just wants to push it through, check the box, and be done. And sometimes there's just the reality. You've got to do that. But more times than not, one of the primary discussions I've had over the years within this particular space, it is not with the true startups. It's with the companies that are a few years down the road. And they've kind of found their product fit. And now they're starting to scale. And it is very common for me to get with a quote-unquote successful ramping up, sharing economy marketplace that their insurance goes from 25,000 to 250,000 to 2 million to 20 million. Just exponentially increases. And sometimes those pain points are-- if you are successful as a marketplace, you will pay a lot more insurance. But it's a function of really the margin percentage of your sales that you want to compress that margin over time. And oftentimes there's a perception that insurance will remain static, even if your growth 3, 4, 5, 10, X is over a 12, 24 month. And that's just not realistic. So giving work with your broker partners, work with your carrier partners of what does that, what does today look like? But what is the next two to three years based on their best guess performance of where the business is going to go? And it can also be things like which markets are you getting into. So for example, like in the ride share space, you get into if you are not in the state of New York, and all of a sudden you're going to expand into the state of New York, well, New York's a no-fault auto state, which is without getting into the details of the insurance weeds, that is a very difficult insurance landscape from an auto carrier standpoint. So you are going to pay generally much higher rates in certain states than others. So there's all this nuance that comes into it and being proactive and partnering with the broker who's active in this space versus reactive will frankly just save you a lot of headaches. Down there again, just like tax planning your business with your accountant, it's the same concept. Yeah, I guess I would add to that too. I've seen countless of my clients who have used their neighborhood insurance broker to procure their insurance program. And they didn't quite understand the business model. And there are very unique defenses and legal posture with this business model that resulted in them either being-- I don't know, you call it-- misinsured. They were not insured for the right business, which in some cases actually resulted in higher premium, because instead of being insured as a kind of a connector or a marketing platform, they were insured as the underlying business that the service providers were performing. And then to the-- I love the accounting tax example, because you're right. Nobody likes doing their taxes unless, on until, they get a huge refund. And then they love taxes. And that analogy holds true because when you work with your insurance brokers and the underwriters and the carriers-- in my experience, and I've done this many times firsthand, oftentimes when they understand both the actual business model, they understand the relationship you have with the supply. And they understand all of the things you're doing for trust and safety. In many cases, your premium is lower than the industry in which you're operating more generally. So I think that the analogy holds true. And if people understand that it's not just a check the box-- God, I've got to call the insurance broker back this week-- and more of, hey, is there an opportunity for us to get some premium savings, make sure that our policies actually covering what we do, making sure we're not overinsured or insured incorrectly, that there's a huge business benefit, both if something goes wrong, but also just kind of in the dollars and the cents potentially. Yeah. And I start out on the underwriting side. So I think that there's always this kind of preconception that insurance carriers are out to get you with some kind of gotcha clause and just rake you over the coals with premium and never pay anything. That's always kind of like the misperception. When you really sit back and I grew up on the underwriting side, so I was in the room when we would do this. When a carrier price is their product, they ultimately have to price a product today with an anticipation and, frankly, a guesstimate. That's where the actual modeling comes in of, what is the likely payout of if I write $100,000, or if I put a million dollar limit out there of auto liability? What's the likelihood of that limit for those say, I charge $100,000 premium? What's the likelihood of me paying out more or less than that premium over a five year period? You got to take into account inflation costs, medical inflation, all sorts of things into the mix. And at the end of the day, a carrier really, for the most part, when you boil it all down, they want to write products with a reasonable return on investment. So like the carriers usually looking for whatever they charge, they're doing their best to try to achieve a 10% to 15% profit margin. So for every dollar of premium they collect, if they only pay out when everything's said and done and the losses are trended out, if they only pay out 85 to 90 cents of that dollar of premium, they've kind of, they've done their job. That's really what they're aiming for. That is exceptionally hard to actually pull off. But that's when you boil it down. That's really the insurance. That's what they're aiming for. As an underwriting manager, when he's still, be responsible for the profitability of these products, that was ultimately, if I could get everything done and do a 10 to 15% profit margin, my executives within the company, they're pretty happy with the book of Business I wrote. So I think that's, if you come with that standpoint of, risk is out there when you're operating your business. And outside of a checklist that say a city is going to require you to do to get your permit, outside of that requirement, like risk, I was so client like, risk does not care whether you insured or not, it's coming for you either way. You have to decide, are you going to accept that risk on your own balance sheet, or are you going and willing to offload a portion of that risk to a third party, IE and insurance company, and if so, what are you willing to pay for that offload of the risk? And again, that's, I'm being very basic in concept, but that conceptually is what you're faced with as a business owner. And so as a broker, my job is not to sell you insurance, my job is to show you what's out there. I can sell you just about anything if you're willing to pay for it at an unlimited cost. I can sure just about anything. But rarely is that the right move. Oftentimes, it's, well, here's your baseline of what you should have to get your permits approved. You have to have these baselines. And then above and beyond that, it's really, here's what you can ensure. Here's what it costs. Then that again, back to your broker needs to really understand the space, because if they don't understand your business, they're not going to be able to say, OK, this tweak, this endorsement we're going to add is worth a 20% additional premium because of how important this coverage is in the space we're operating with. Or hey, they're charging you for this. You don't really have that exposure. Carve that out. Don't worry about that product. There's a lot of people. lot of when I first get brought into a client that or a perspective client that has an existing insurance stack, usually what we review, like we're often finding is like you're really underinsured here, there's this big coverage gap you're unaware of, or you're double spending here, like you really don't need this product and you should save the money here and apply it over to this gap. So yeah, I can't stress enough the importance of in the sharing economy, you know, space. And there's just, there's not many brokers that truly specialize. It's a very small group. So just quiz your broker like you would quiz your lawyer or anybody else of like what are the clients do you have? How long have you been in the space? Ask them who their carrier partners are because again, there's only if, there's a handful of carriers that are really strong in the space. And that'll tell you a lot of whether they kind of have a command of the space and in good experience. Because it pays off in the long run, it doesn't always show itself at the front end. But it really shows itself over time as you work with that. It's interesting, one of the things I wrote in the book is to do exactly that, right? Is to kind of quiz, quiz anybody you're looking to work with. The very simple questions are like do you understand, explain to me how our business model works, explain to me how your understanding of our monetization, right? It's explained to me, do you understand how our legal posture and there's just a few questions where you were, you know, somebody who's in the space, this is a no brainer, they don't have to practice. But otherwise you're going to see, you're going to see some fumbling around. And it is key for all of the reasons you mentioned. In the book, a couple of the specific terms that I talk about that in my experience have been very beneficial to negotiate or kind of deductible versus retention, kind of explaining the events inside and out the lit, outside of the lit insurance limits, exclusions and what they mean and kind of how broad they can be interpreted. Panel counsel, when something goes wrong, why it's important to know who those lawyers are. And then one thing that I think maybe is not so prevalent or something that I really pushed for is negotiating kind of my ability to control communications prior to a lawsuit in large part because I think when plaintiffs counsel sees a law firm or insurance company responding, it's like that's when there's kind of blood in the water and they're ready to go hunting. And I've had very good success responding with basically all of our defenses and explaining that there's no there there. And so they, it's kind of, I think tones it down a little bit. But last thing I think before we go, you know, one of the questions that I get all the time at a weekly basis is, you know, do I need insurance? What kind of insurance do I need? And so, you know, I always start with explaining kind of the general liability policy and I'm wondering kind of like in a kind of 30 seconds or less, I know that there's a lot more to unpack. But you know, for an early stage startup, you know, what insurance, what are the different types of policies you would recommend right out of the gate, right? We understand that in the at some point you want a complete program. But, you know, if you could just give you at a super high level, what are the types of policies so that when they go to their broker, they can say, hey, I heard about these policies and we should, you know, that we should be investigating these policies and kind of what they're for. Yeah. So, yeah, just just going off of your book, I think you mentioned general liability cyber directors and officers and Arizona missions. So there are, you know, there's 100 different products you can buy. I think to you know, I think I laid in this in your book. So, the liability is basically going to handle liability from slips, falls and a libel slander bodily injury type coverages. So again, depending on your business, there are very different general liability risks. But if you're just in startup mode, oftentimes, that is like one of your basics. In most any contract you sign, there will be an insurance requirement section of a commercial contract that will almost always require you to have some form of general liability insurance. Again, it varies wildly depending on your business. So if you are, if you're in a platform where you don't have a lot of customers on premises, that's, you know, one exposure. If you are going into people's own home, so if you're doing like, you know, an Angie's list, a taskrab, those types of things, those are very, very different. If you just common sense think through, hey, what could go wrong from a bodily injury standpoint? Those have very injuries. Directors and officers, so very simply directors and officers, covers the executive team for allegations of kind of fraud mismanagement and the competitive type claims. So basically, executive C suite didn't run the business right. That's oftentimes really important, not so much in the early, early stages, but as you scale, getting good board talent, they will often, that'll be kind of table stakes of have a good deal of policy in place. If you are, if you have, if you own any autos, right, you need commercial auto insurance. If you don't own autos, but people are bringing autos on your platform, that's, that's a very different insurance setup, but equally important and often mandated depending on the jurisdiction. So, if you have that exposure, you need to add that in. And again, you're going to think of it as layers of an onion as you expand your business. There will be areas where you need to expand your coverage. Again, we'd read all roles back to like the importance of your broker understanding your business and understanding the industry you're in. They can build out the roadmap of, okay, today's, you know, the next 12 months, you might need to budget 10 grand for your insurance. But based on where you're going, you need to budget next year at 150 and the year after that 500,000 whatever it is. You know, because it does scale much quicker than you think it will if you don't pay attention to it ahead of time. Right. That's, I mean, I echo all of that obviously. Thank you, Garrett. That wraps up our dive into this chapter of both "Povermerk Place." If you haven't already, grab a copy of the book on Amazon. There's a lot more detail and context in there. And if you found this episode helpful, share it with your team or a fellow marketplace operator. Thanks for listening and stay bulletproof from there.