As online shopping continues to grow in popularity, so do lawsuits levied against ecommerce businesses. In this blog, we’ll explore the ecommerce business insurance available for online businesses and retailers, which type of coverage you need, and how to go about creating a plan that’s right for you.
Why Do Ecommerce Businesses Need Insurance?
Ecommerce may mitigate some of the risks that traditional brick-and-mortar businesses face — such as slips and falls and storefront damage — but no ecommerce business is completely risk-free. Online stores need ecommerce insurance to help them cover financial losses and damage arising from business operations. Some of the common risks facing ecommerce businesses and online retailers include the following:
- Injuries or property damage caused by defective products.
- Breach of customer data on a website.
- Supply chain issues that prevent you from fulfilling orders for customers.
- Litigation based on failure to deliver a product or service on time or breaching a client’s contract.
- Stolen or damaged inventory that you may have at your business location while being transported, or while being stored at a supply warehouse.
So, do you have to insure your ecommerce business? Absolutely! With that covered, let’s dive into the different insurance options available to ecommerce businesses.
What Insurance Do You Need for an Ecommerce Business?
The most common and essential ecommerce insurance for online retailers and small businesses is general liability insurance, which we’ll cover in greater detail below. However, depending on the type of business and what services/products you offer, you may find it in your best interest to have more than just the basics.
Ecommerce General Liability Insurance
To cover third-party claims for bodily injury and property damage, most ecommerce businesses will typically need general liability insurance, which covers the following:
Bodily injury. An interaction with your company that results in bodily injury claims on the part of third parties. The general liability coverage on your business would cover the medical expenses of a customer who slips on a box and sprains their wrist, as well as legal expenses if they sue you.
You can still take advantage of this type of ecommerce business insurance even if you run your online company from home. This policy would cover medical bills, legal fees, and settlement costs associated with breaking an arm if a delivery driver trips on a broken stair while dropping off a shipment for your business.
Property damage. Your general liability insurance will reimburse you for the cost of the damaged or broken third-party property while on your business’s premises. For instance, property damage coverage will pay for a cell phone if a customer comes to pick up an order at your home business and you accidentally spill hot coffee on their phone while taking their payment.
Personal and advertising injury. This covers allegations of libel, slander, and copyright infringement brought against your company by a third party.
Ecommerce businesses would benefit from their own liability insurance policy. This operating as a home-based retailer, even if you do not receive many business-related visitors, needs to make sure their existing homeowner’s policy addresses the operation of a business out of the home and look into making sure the business operations do not negate coverage under their homeowner’s policy.
Product Liability Insurance
Product liability insurance for ecommerce businesses protects organizations against claims by third parties claiming their products did bodily harm or property damage. Under such a policy, physical or property damage will be covered if caused by the following reasons:
- Manufacture defects.
- Deficiencies in design.
- An inadequate set of instructions, warnings, or labels.
Example: say you sell skincare products through your ecommerce business, and a customer becomes allergic to one of the ingredients and decides to sue, your product liability insurance will cover the claims-related medical expenses, legal fees, and settlement costs.
This covers expenses for medical treatment of employees suffering from work-related illnesses or injuries. A workers’ compensation policy is usually required by law in most states.
Example: an ecommerce workers’ comp policy would cover any medical costs associated with an employee accidentally cutting themselves while preparing online orders for shipment from your inventory warehouse.
Commercial Property Insurance
What is commercial property insurance? This policy covers physical assets like inventory, equipment, and other assets owned by your business. It provides coverage for financial losses incurred by property damage caused by weather, accidents, and other hazards.
Example: if a fire destroys all supplies stored in your office and you want to replace your inventory, commercial property insurance coverage will assist with the costs and help you get back on your feet.
Commercial Auto Insurance
Most states require commercial auto insurance coverage for business-owned vehicles. This policy covers accidents involving an online retailer’s delivery van or other vehicles.
Example: this insurance will ensure you’re covered in the event of damage to your vehicle (or a fellow driver’s), injuries caused to another person or yourself, and repairs due to vandalism or weather.
Information security breaches, ransomware attacks, and hacking can result in serious financial losses. In fact, a recent report states that more than 30% of U.S. small businesses have weak points hackers can easily exploit, and 2021 saw almost half a million Microsoft 365 accounts compromised.
Example: this policy would pay for notifying your customers, investigating the incident, and providing credit monitoring services if your ecommerce website is hacked and hackers steal the stored credit card information of all your customers. If you are sued as a result of a cyber incident, cyber insurance can also cover costs such as risk assessments and legal fees.
Business Interruption Service
Business interruption insurance helps replace lost income and pay for extra expenses when a business is affected by a covered peril. Business interruption coverage (sometimes called business income coverage) is typically part of a business owner’s insurance policy.
Example: this insurance provides coverage for your income if a fire destroys your warehouse where orders are shipped, as well as the essential expenses you need to cover until your store is up and running again.
Directors & Officers Insurance
All startups, regardless of industry, should have directors & officers insurance (also known as D&O insurance) to protect company leaders against lawsuits alleging a breach of fiduciary duty or mismanagement.
Example: D&O insurance can assist in the recruitment process for strong leaders, assuring them that they will not be at risk while serving your company. In addition, maintaining this coverage can enhance the opportunity for you to attract venture capital to expand your growth potential.
Technology Errors & Omissions Insurance
Product liability, cyber, and tech errors and omissions can be considered the trifecta of coverages for ecommerce business insurance. The combination of the product’s liability and cyber security address situations involving physical injuries caused by your product, and the unauthorized disclosure of proprietary information, respectively.
Rounding this out, technology E&O insures against claims arising from the failure of your product to perform its intended purpose or any errors related to the services you offer in conjunction with your product. No matter where the issue originates and whether it’s directly related to your operations or indirectly to the technology involved in the process, you are at risk from claims. Consequently, the need for technology errors and omissions to complete your insurance program is critical.
Example: a client is having IT problems and claiming the software you sold them is the culprit. This policy would pay for legal costs such as court fees, legal counsel costs, court-ordered judgments, and settlement costs.
Commercial Crime Insurance
Commercial crime insurance protects your company from potential crimes committed by your employees and third parties.
Example: this policy would cover crimes related to embezzlement, fraudulent transactions, and robberies involving your inventory while in storage or in transit.
In transit or while being stored at a third-party location, business property may be subject to liability. Theft, vandalism, as well as certain natural disasters and hazards, are all covered under this policy.
Example: this policy will cover the costs to replace stolen computers if your delivery van is broken into while you are receiving orders for your online electronics store.
Determining the Cost of Ecommerce Business Insurance
Typically, businesses with higher risk — and those that need more insurance coverage — will have higher costs. Therefore, small business insurance for an ecommerce retailer with limited customer foot traffic will likely have much lower costs than an online business with multiple employees, or one that runs operations through a separate warehouse.
The price of a business insurance policy depends on the following factors:
- How many policies a business needs.
- Limits of the policy and the extent of your coverage.
- Location of the business.
- Products or services the business offers.
- Number of employees a business has.
- The assets a business has.
- Previous claims history.
How to Get Ecommerce Business Insurance
Wading through the ecommerce business insurance options available for online businesses and retailers can feel like a lot of work. To help you get started, the following four steps can serve as a helpful guide in the right direction.
- Evaluate your risks. What types of accidents, hazards, disasters, or lawsuits is your business most vulnerable to? Is your online store home-based? Do you have employees? Is your inventory stored in a central location, and how are the products transported to customers? Knowing these details can help you determine the risks facing your company.
- Consider Alternatives to Just Purchasing Insurance. There are ways to reduce risk that do not require you to purchase a policy, and not all risk can be addressed by writing a check to an insurance company. A proper analysis and discussion will help identify and establish best practices to reduce your risks where purchasing insurance to cover the risk isn’t an option.
- Determine what type of policy you need. Your business will be best protected with an ecommerce insurance policy based on the risks you’ve identified. Most online retailers should consider general liability coverage and product liability insurance as their first options, but additional coverage – such as cybersecurity insurance, professional liability insurance, and commercial property insurance – can be beneficial as well.
- Choose the insurance channel that suits you best. In order to purchase your ecommerce business insurance, you have multiple options to choose from. These include working with an insurance broker, using an online marketplace, or speaking directly with the insurance provider. Each of these channels has there advantages, but only working with an agent will provide you the opportunity to work with someone who is not employed by the insurance company and can help with alternatives to just purchasing an insurance policy.
Additional Ways to Protect Your Business
Although it’s easy (and essential) to invest in ecommerce business insurance, it shouldn’t be your frontline of defense. Yes, insurance will compensate for your business’ financial losses after an incident occurs, but it’s much better to avoid losses altogether.
With this in mind, here are several things you can do to better protect your business:
- Use legally robust contracts and other business documents.
- Set up a limited liability company (LLC) or corporation to protect your personal assets.
- Stay up to date with business licensing.
- Streamline your business’s internal processes. This will remove unnecessary variables from common tasks and create a safe, consistent environment for conducting business.
- If your business is an LLC, look into LLC Insurance.