Don't Wait to Protect Your Business
One of the most common mistakes new product companies make is waiting to bind product liability insurance until revenue starts flowing. It makes intuitive sense, right? Why pay for coverage when nothing is selling yet? But this thinking ignores the real exposures that exist from day one.
Mike Tanghe, president of Falcon West Insurance Brokers, has walked many clients through this exact conversation.
"We recently had a client who got through the quoting process and then said, 'I'm just going to wait until our product is actually in the field before we turn on insurance.' It was a substantial monthly outlay they were trying to delay until revenue came in. But when we walked through their loan covenants, investor agreements, and client contracts, it became clear—they couldn't afford to wait."
The risks of delaying product liability insurance go far beyond a simple coverage gap. They can unravel financing arrangements, derail client relationships, and leave your business exposed to claims that could end it before it truly begins.
Loan, Investor, and Client Covenants Mean Early Coverage Is Often Non-Negotiable
Most product companies don't operate in a vacuum. They have lenders, investors, and clients, all of whom have a say in when insurance needs to be in place.
Loan Covenants
If you financed equipment, inventory, or machinery, your lender almost certainly requires insurance from the day the loan funds. Banks and private lenders want assurance that their collateral is protected. A 2024 industry survey found that over 68% of startups reported that insurance-related debt covenants significantly influenced their financing terms. Fail to maintain coverage, and you risk triggering a default, even if you've never missed a payment.
Investor Covenants
Venture capital and private investors increasingly require continuous insurance as a condition of funding. According to a recent survey, over 70% of early-stage VC term sheets now contain explicit insurance requirements. Investors aren't just protecting their capital; they're protecting the company's ability to operate. If coverage lapses, investors may withhold future tranches of funding or exercise default provisions in their agreements.
Client Contracts
This is the one that catches many business owners off guard. You land a purchase order or a distribution agreement, and buried in the contract language is a requirement to provide a certificate of insurance, often before the first unit ships.
"We've seen clients come to us and say, 'We signed this contract and now we have to provide proof of insurance that we didn't know we had to have.' And the dates don't match up. If coverage isn't in place, there's no certificate we can issue. And no, we can't backdate things—you didn't have coverage, so we can't show that on a certificate." — Mike Tanghe
Ignoring these covenants puts your business at risk of breaching agreements, potentially triggering defaults, withheld funding, or outright contract failures.
Product Demos and Trials Create Exposure Before Sales
Even if your product hasn't generated a dollar in revenue, it may already be creating liability exposure. If you're demoing equipment at a client site, running field trials, having units serviced by a third party, or letting prospects test your product, you have exposure.
Courts don't distinguish between a "pre-launch" product and one on the market. Under strict product liability, a manufacturer can be held liable for injuries caused by a defective product regardless of whether a sale has taken place. The landmark case Delaney v. Towmotor Corp. established that a manufacturer who bails a finished product to a prospective buyer for trial demonstration is still subject to strict liability if that product injures someone during the demo.
"Sometimes people think, 'I don't have any sales yet, so I don't have exposure.' That's not necessarily true. Are you demoing this product in the field? Are you doing free trials? Is it being serviced by a third party? Any of those things creates exposure for you as a company." — Mike Tanghe
The numbers reinforce the urgency. The average small business liability claim in the United States now costs $97,200, and product liability filings reached over 56,000 cases nationally in recent years. A single uninsured claim during a demo phase could bankrupt a startup before it ever reaches full production.
The Dangers of Coverage Gaps and "Renting" Insurance
Some business owners attempt a middle-ground approach: delay coverage, then bind it right before they need a certificate. In the industry, this is known as "renting" insurance—purchasing short-term or just-in-time coverage with no intention of maintaining it long-term.
Carriers see right through this strategy, and it backfires more often than it works.
"Underwriters don't like to rent coverage. A reinsurance underwriter I had lunch with put it plainly—they don't want to feel like they're being used for a quote this year and then dropped. On larger commercial accounts, loyalty and continuity matter." — Peter Brecht, Falcon West
When a carrier reviews your application and sees a gap in coverage history, it raises immediate red flags. The carrier's logic is straightforward: a company that lets its coverage lapse may be underfunded, cutting corners, or deferring maintenance, all of which increase claim risk. Many carriers will simply decline to quote. Others will demand significantly higher premiums to account for the perceived risk.
This mirrors what happens across all lines of insurance. Research shows that even in personal auto coverage, a lapse can increase premiums by $75 to $250 per year, and some carriers refuse to reinstate policies altogether. In commercial product liability, the stakes and the penalties are amplified.
Maintaining continuous coverage builds trust with underwriters and creates a track record that leads to better pricing at renewal.
How Brokers Secure Affordable Coverage Pre-Revenue
The good news is that you don't have to absorb full-rate premiums before your first sale. This is where working with an experienced broker makes a measurable difference.
Falcon West's approach with pre-revenue clients is to go back to the carrier and renegotiate the rating basis. Since product liability premiums are typically calculated on projected revenue, a broker can present the carrier with updated revenue timelines that reflect the actual ramp-up period.
"What we did was go back to the carrier and say, 'Here's their anticipated revenue for the next 12 months—they're actually not going to start generating revenue for another two months.' So we lowered that rating basis but still got coverage in place. Effectively, the client got two months of coverage at little to no additional cost compared to the original proposal." — Mike Tanghe
Here are three strategies a broker can use to make early coverage work for your budget:
- Lower the rating basis. If your revenue won't materialize for 60–90 days, your broker can negotiate a reduced premium for the early months of the policy period.
- Start modular. Bind coverage that matches your core product risks today, then scale up as your operations grow.
- Maintain continuity. Even a lower-cost policy keeps your coverage history intact, which pays dividends at renewal when carriers see an unbroken record.
The result is essential protection without breaking the bank—giving your business compliance with financing and client contracts while preserving cash flow.
Bottom Line: Get Insured Before You Need It
Waiting for your first sale to bind product liability insurance is a gamble that puts everything at risk—your financing, your client relationships, and your ability to get affordable coverage in the future.
The costs of being uninsured aren't hypothetical. Loan defaults, lost contracts, declined carrier quotes, and uninsured claims are real consequences that hit pre-revenue companies every year.
Your broker is your best ally in making early coverage work. A good broker doesn't just find you a policy—they negotiate timing, structure premiums around your revenue ramp, and keep your coverage history clean so that when your business scales, your insurance costs stay competitive.
Don't risk everything waiting for revenue. Get insured early. Protect your cash flow, your relationships with banks, investors, and clients—and your company's future.
This article is based on Episode 17 of the Falcon Forward podcast, featuring Falcon West president Mike Tanghe and broker Peter Brecht. For help evaluating your product liability insurance timing and options, contact Falcon West Insurance Brokers.