Defence Tech Startup Insurance in India: iDEX Awards, MoD Contracts, and Weapons Systems Product Liability

The Innovations for Defence Excellence (iDEX) initiative, launched by the Ministry of Defence in 2018 and operated through the Defence Innovation Organisation, has funded over 400 challenges across DISC (Defence India Startup Challenge), Open Challenge, and Prime tracks between 2018 and 2025, with total grant commitments exceeding INR 700 crore. The iDEX-funded startup cohort, supplemented by Strategic Partnership-route investments and direct procurement contracts from the three services, now numbers approximately 150 active companies building products across drone systems, counter-drone systems, ISR (intelligence, surveillance, reconnaissance) platforms, electronic warfare systems, secure communications, autonomous ground vehicles, and AI-enabled C4ISR.

This cohort sits at an awkward intersection for the Indian commercial insurance market. The companies are too small for the defence-prime insurance programmes that have historically served L&T Defence, Tata Advanced Systems, Bharat Forge Defence, Bharat Dynamics, and Hindustan Aeronautics. They are too sensitive (dealing with weapons, weapons-adjacent technology, and classified specifications) for the general SaaS and technology insurance products. Their contracts with the MoD and the three services come with terms that do not match the standard commercial insurance templates used in India.

This post addresses how iDEX-funded and other early-stage Indian defence-tech startups should structure insurance, with attention to:

• procurement contract bonds required by MoD and DPSU contracts
• weapons-systems product liability for autonomous and kinetic systems
• ITAR and IPR exposure for technology with foreign components or licensing
• MoD prime-contractor flowdown requirements when serving as a sub-tier supplier to L&T, Tata, or other primes

The post does not address established defence OEMs operating at scale, which is covered separately in defence-manufacturing-insurance-india. The risk profile, contract structures, and insurance approach for early-stage defence-tech are materially different from established OEMs, and conflating the two creates coverage errors that have surfaced in claims situations over 2024 and 2025.

Defence procurement under the Defence Acquisition Procedure (DAP) 2020 and earlier versions specifies bonding requirements at multiple stages of the contract lifecycle. Indian defence-tech startups receiving MoD or service contracts encounter three categories of bond requirements that must be insured or guaranteed.

Earnest Money Deposit (EMD) bonds are required at the tender stage. The EMD is typically 2 to 5 percent of the bid value, refundable upon non-award and forfeited if the bidder withdraws after award. For an iDEX-funded startup bidding for a INR 50 crore contract, the EMD requirement of INR 1 crore to INR 2.5 crore would otherwise tie up scarce cash. Most service tenders accept bank guarantees in lieu of cash EMD, but the bank guarantee requires the startup to maintain a deposit against the guarantee, which has the same cash effect. IRDAI-licensed insurers can now issue bid bonds under the IRDAI (Surety Insurance Contracts) Guidelines 2022, which is a meaningful cash-flow improvement for early-stage defence-tech.

Performance Bank Guarantees (PBG) are required at contract signing, typically 5 to 10 percent of contract value, valid through the warranty period (typically 18 to 36 months from supply). The PBG is forfeit if the contractor fails to perform contractual obligations including delivery, quality, and warranty terms. For a INR 100 crore contract with 10 percent PBG, the startup must arrange a INR 10 crore guarantee. Surety bonds under the 2022 framework can now substitute for bank guarantees in many MoD contracts, though some contract clauses still specify bank guarantees only.

Advance Payment Guarantees are required when the contractor receives advance payments against the contract value. MoD contracts frequently include advance payment provisions of 10 to 20 percent of contract value, against which the contractor must provide a guarantee that the advance will be refunded on demand if the contractor defaults. For technology-development contracts where the startup's working capital is constrained, the advance payment is essential, but the corresponding guarantee requirement creates a chicken-and-egg problem for an early-stage company.

The practical position for iDEX-funded defence-tech startups is:

• maintain a banking relationship with one of the public sector banks that has experience with MoD bonds (SBI, Canara Bank, Bank of Baroda, Bank of India), which streamlines the guarantee issuance process
• explore surety bond placements with IRDAI-licensed insurers as an alternative to tying up cash collateral for bank guarantees
• structure investor commitments to ensure bond collateral availability at contract signing rather than relying on subsequent financing rounds
• understand the specific bond release schedule in each contract; PBGs may release in tranches against delivery milestones rather than at warranty period end

Surety bond pricing for MoD performance bonds, where available, is currently 0.6 to 1.4 percent of bond value annually, against approximately 0.5 to 1.0 percent for bank guarantees, but with the material advantage of not requiring cash collateral.

Product liability insurance for weapons systems and weapons-adjacent technology is one of the most constrained categories in the Indian insurance market. Standard Indian Product Liability wordings, filed under IRDAI's liability framework, include specific exclusions for weapons, ammunition, and military-use products. The exclusions are sometimes drafted broadly enough to capture dual-use technology where the same product has civilian and military applications.

For Indian defence-tech startups producing kinetic systems (drones with weapons payloads, anti-drone interceptor systems, autonomous ground vehicles with weapons mounts) the standard PL market is effectively closed. The available product liability cover comes from:

• specialty markets in Lloyd's of London, which have historically written defence and aerospace product liability for prime contractors and now selectively for smaller manufacturers
• Indian insurers writing manuscript wordings that include weapons-specific carve-outs and endorsements, available through brokers with engineering and defence practices
• captive arrangements through GIFT City for retained risk where third-party coverage cannot be obtained

The underwriting questions for weapons-systems product liability are different from standard PL. The underwriter is concerned with: the probability of unintended actuation or unintended target engagement, the probability of failure modes that result in harm to friendly forces (fratricide), the probability of post-deployment failures during military operations, and the contractual indemnification structure between the contractor, the MoD or service, and the end user.

MoD contracts typically include indemnification provisions where the contractor indemnifies the MoD against third-party claims arising from product defects, but with significant carve-outs for combat use, operational deployment, and conditions outside the contractor's control. The interaction between the MoD indemnity and the contractor's insurance is contract-specific and requires careful review. A contractor who has indemnified the MoD broadly may have created exposure that the available insurance does not cover.

For non-kinetic defence-tech (ISR sensors, EW systems, communications equipment, software platforms), the PL position is materially easier. Standard PL wordings can be negotiated to capture these products with appropriate exclusions for use in active combat operations. Premium levels for non-kinetic defence-tech PL run 0.4 to 1.2 percent of revenue for limits of INR 10 crore to INR 50 crore, against 0.15 to 0.4 percent for civilian technology products.

Product Liability sublimits for combat-zone use are typically excluded entirely in available wordings; the contractor's residual exposure for combat-zone product failure is uncovered and must be managed contractually or through indemnification from the MoD.

Drone swarm and anti-drone systems are among the highest-growth segments within Indian iDEX-funded defence-tech, with companies including NewSpace Research, Botlab Dynamics, Z-Motion, Big Bang Boom, and several stealth-mode operators developing capabilities for the three services. The insurance considerations for these segments have several specific features.

Drone swarm systems involve multiple coordinated unmanned aerial vehicles operating under a control system, with potential payloads ranging from sensors and communications relays (non-kinetic, ISR applications) to munitions and decoys (kinetic, strike applications). The product liability exposure depends materially on the payload category and intended deployment. The Indian Aircraft Rules 2021 do not apply to military drones operated by the services, but they apply to drones during development, testing, and demonstration phases when the contractor is the operator. This creates a phase-by-phase insurance requirement: drone-operator liability during development (under DGCA rules with insurance per the Drone Rules 2021), and product liability post-delivery (separate insurance considerations).

Anti-drone systems include detection (radar, RF detection, optical and acoustic), tracking (sensor fusion, AI-based target identification), and neutralisation (jamming, spoofing, kinetic interceptors, directed energy). The neutralisation function creates the most significant liability exposure because of the potential for collateral effects. A kinetic interceptor that destroys a hostile drone over an urban area may produce debris that damages property or causes injury. A jamming or spoofing system that affects civilian aviation, ground-based wireless services, or other electronic systems creates exposure to operators of those systems.

For anti-drone deployments at civilian sites (airports, government installations, oil and gas facilities, religious venues), the contractor's insurance must address the third-party risk to non-target parties affected by neutralisation actions. Standard Indian liability wordings do not contemplate this exposure. Specific endorsements or manuscript wordings are required, and pricing reflects the underwriter's view of the deployment context.

A further consideration for both drone-swarm and anti-drone systems is the cybersecurity exposure. A drone control system that is compromised can be used by an adversary to cause harm; an anti-drone system that is spoofed can fail to detect or engage legitimate threats. Cyber liability coverage for defence-tech is typically excluded from standard Indian cyber wordings because the policies were not designed for weapons-adjacent systems. Specialty cyber coverage for defence applications is available from Lloyd's and a small number of Indian insurers with manuscript wordings, at premium loadings of 2x to 4x standard cyber rates.

Premium benchmarks for combined product liability and operations cover for an iDEX-funded drone or anti-drone startup with INR 30 crore to INR 80 crore in revenue typically run INR 35 lakh to INR 1.2 crore annually for a full programme covering operations, product liability, and cyber, against a comparable civilian SaaS company's INR 20 lakh to INR 50 lakh.

Indian defence-tech startups working with foreign technology components, foreign licensors, or foreign engineering services encounter export control exposure that has insurance implications. The relevant regimes include:

ITAR (International Traffic in Arms Regulations) of the United States governs the export of defence articles and services from the US. Technology imported under ITAR-controlled licences carries strict re-export, end-use, and end-user restrictions. An Indian defence-tech company that incorporates ITAR-controlled components in its product, or that received ITAR-controlled engineering services, is bound by re-export restrictions that limit the customers and uses for which the resulting product can be sold.

EAR (Export Administration Regulations) of the US govern dual-use items and have similar but less restrictive controls.

SCOMET (Special Chemicals, Organisms, Materials, Equipment and Technologies) is the Indian export control regime, governing exports of dual-use and military items from India to foreign customers.

Violations of these regimes can result in substantial penalties, criminal liability for company officers, and revocation of export licences. The penalties under US export control law can include fines per violation of USD 1 million or more, criminal penalties for wilful violations, and denial of future export privileges.

Insurance treatment of export control exposure is limited. The Indian insurance market generally does not offer specific export control violation coverage; the exposure must be managed through compliance rather than insurance. However, two insurance touchpoints exist:

Directors and Officers Liability policies in India may cover defence costs for individual officers facing allegations of export control violations, subject to the exclusion for deliberate wrongdoing that applies in most D&O wordings. The defence costs coverage is significant because export control investigations frequently involve substantial legal expense even when no violation is ultimately found.

Professional Indemnity policies for the company may cover defence costs for the company in regulatory proceedings related to export control violations, again subject to deliberate wrongdoing exclusions.

IPR exposure is a related concern. Defence-tech products frequently incorporate technology developed under MoD or service R&D funding, where the IPR rights are governed by DPP/DAP provisions on Foreground Intellectual Property and the specific contract terms. Disputes over IPR rights between the contractor and the MoD, or between the contractor and a foreign licensor, can result in significant litigation expense. IPR liability for infringement of third-party IPR is covered under standard PI extensions in India at limits typically capped at INR 5 crore to INR 25 crore, which may be inadequate for high-stakes defence-tech disputes.

A practical position for export control and IPR exposure is rigorous internal compliance combined with D&O and PI cover sized to provide meaningful defence cost protection, while accepting that the primary risk management is operational rather than insurance-based.

Many iDEX-funded defence-tech startups participate in MoD programmes as sub-tier suppliers to defence primes including L&T Defence, Tata Advanced Systems, Bharat Forge Defence, Mahindra Defence, Adani Defence, and DPSUs like Bharat Electronics, Hindustan Aeronautics, and Bharat Dynamics. The contract structure between the prime and the sub-tier supplier includes flowdown provisions that pass MoD requirements through to the sub-tier.

Insurance-related flowdown requirements typically include:

• product liability insurance at specified limits (commonly INR 25 crore to INR 100 crore for kinetic systems, INR 10 crore to INR 50 crore for non-kinetic systems)
• general liability and operations cover at specified limits
• workmen's compensation under the Employees Compensation Act 1923 with extensions for hazardous operations
• contractual indemnification of the prime contractor against claims arising from the sub-tier's product or operations
• additional insured status for the prime contractor on liability policies (or equivalent waiver of subrogation)
• maintenance of insurance throughout warranty periods (often 24 to 60 months post-delivery)
• specific approval of insurer ratings (typically requiring 'A' rated or equivalent insurers, which most Indian non-life insurers meet but some smaller niche carriers may not)

The specific provision that most frequently creates difficulty for early-stage defence-tech is the indemnification of the prime contractor against third-party claims. The standard flowdown indemnity is broad: the sub-tier indemnifies the prime against all losses, costs, and expenses arising from the sub-tier's product, regardless of fault. This is materially broader than what a standard product liability policy covers (which responds to legal liability based on negligence or strict product defect).

The gap between the contractual indemnity and the available insurance is uncovered exposure that the sub-tier has assumed. For an iDEX-funded startup with INR 20 crore in revenue and INR 25 crore PL limit, an indemnity obligation to a prime contractor for a INR 75 crore product failure scenario creates substantial residual exposure.

Negotiating the flowdown indemnity is essential. Standard positions a sub-tier can credibly negotiate include:

• limiting the indemnity to losses caused by the sub-tier's negligent or wilful failure rather than strict liability
• excluding consequential and indirect losses
• capping the indemnity at the sub-tier's PL policy limit (with the prime acknowledging this is the contractor's effective exposure)
• carving out losses caused by the prime's modifications to the sub-tier's product
• mutual indemnification rather than one-way indemnification where the prime's actions can also contribute to losses

These positions are often accepted by primes when the sub-tier presents them as standard market terms, supported by broker certification that the requested broader indemnity is uninsurable in the Indian market. Where the prime refuses to modify the indemnity, the sub-tier must price the residual exposure into the contract and consider captive or self-insurance structures for the gap.

A practical insurance plan for an iDEX-funded defence-tech startup moving from challenge award through to series production:

iDEX Challenge stage (grant funding, prototype development): At this stage the company is developing a prototype with iDEX grant funding, with limited revenue and limited operational exposure. Required cover: D&O at INR 2 crore to INR 5 crore limit (annual cost INR 1.5 lakh to INR 4 lakh), basic property and equipment cover for the development premises, public liability covering visitors and demonstrations, and statutory workmen's compensation. The defence-tech sensitivity does not typically affect these basic covers. Total annual spend: INR 3 lakh to INR 7 lakh.

Demonstration and trial stage (early service trials, pilot procurement contracts): The company is conducting field trials with the services and may have small initial procurement contracts. Cover required: increased D&O at INR 5 crore to INR 15 crore, Operations cover including transit risk for prototypes, increased Public Liability for trial activities, drone operator liability under DGCA rules if applicable during trials, and Product Liability if production units have been delivered. Total annual spend: INR 8 lakh to INR 25 lakh.

Production contract stage (regular procurement contracts, INR 30 crore to INR 150 crore in revenue): The full programme is now needed: Product Liability at limits matching contract flowdown requirements (typically INR 25 crore to INR 100 crore), Operations and General Liability, Cyber Liability with defence-specific endorsements, D&O at INR 20 crore to INR 50 crore, Performance bonds and Advance Payment guarantees for active contracts, and ITAR/EAR compliance defence cost cover through PI extensions. Total annual programme cost: INR 45 lakh to INR 1.8 crore depending on product category and contract volume.

Series production and prime supplier stage (INR 150 crore plus in revenue, supplier to primes and direct MoD contracts): The programme expands to include captive arrangements through GIFT City for retained risk, increased limits across all lines, specialty cyber coverage for production environments, and potentially manuscript wordings that capture the company's specific product portfolio. Total annual spend: INR 1.5 crore to INR 5 crore.

Broker selection for defence-tech is the most material insurance decision an iDEX-funded startup makes. The broker must have direct relationships with engineering and liability underwriters experienced in defence risks, Lloyd's coverholder access for specialty placements (particularly for weapons-systems PL), surety bond placement capability with IRDAI-licensed insurers, and ideally an in-house compliance specialist who understands MoD contract terms and DPP/DAP requirements. Most global composite brokers have defence practices, though depth varies. Several Indian specialist brokers have developed defence-tech client practices serving the iDEX cohort specifically.

iDEX-funded defence-tech startups operate within a defined trajectory: initial grant funding, demonstration and trial, initial procurement contracts, eventual scaling either through direct MoD contracts or through acquisition by a strategic player (defence prime, DPSU, or international defence company). Insurance considerations evolve materially through this trajectory.

For a startup pursuing direct procurement scaling, the insurance programme grows in proportion to contract values and product portfolio. The standard structure for a mid-stage defence-tech company with INR 200 crore to INR 600 crore in annual revenue is a layered programme with multiple primary carriers, increased limits across all lines, and captive participation for retained risk. The captive option through GIFT City is becoming more relevant for defence-tech in 2026 as several companies in the cohort approach the revenue and risk profile where captive economics become favourable.

For a startup pursuing acquisition exit, several insurance issues become material in the M&A process:

Representations and Warranties Insurance (RWI) is now standard in Indian defence M&A transactions above INR 100 crore in deal value. The RWI policy covers breaches of the seller's representations to the buyer, allowing the seller to receive purchase price consideration without long-tail indemnity obligations. Defence-tech RWI placements have specific underwriting concerns including export control compliance history, MoD contract compliance, and product liability exposure for previously delivered units. Premium for defence-tech RWI is typically 3 to 5 percent of the policy limit against 2 to 3.5 percent for standard technology M&A.

Run-off (tail) coverage is required for D&O and PI policies to protect former officers and the dissolving entity against claims that may arise after the transaction. For defence-tech, the tail period should reflect the possible delay in product liability claims emerging from delivered systems; 6 to 8 year tails are common for product liability, materially longer than the 3 to 4 years typical for technology M&A.

Buyer assumption of insurance is a specific negotiation in defence M&A. The buyer may require that the target maintain its existing insurance programme post-close, may want to consolidate the target's coverage into the buyer's broader programme, or may negotiate specific covers to be carved out and continued separately. The contract terms in MoD contracts with the target that specify insurance requirements continue to apply post-close, and changes to coverage must be coordinated with MoD contract administrators.

Strategic Partnership transactions under DAP 2020 Chapter VII (where an Indian company partners with a foreign OEM for major defence platforms) create specific insurance requirements around the SP entity's PL coverage, the flowdown to the Indian partner of the foreign OEM's insurance requirements, and the cover for technology transferred under the Strategic Partnership. These are highly contract-specific and require coordination between defence and corporate insurance specialists.

The long-term insurance strategy for an iDEX-funded defence-tech startup should be set early. Decisions about insurer relationships, captive structures, claims history management, and broker selection compound over the company's life and materially affect both ongoing programme economics and exit valuation.