Does Your E-commerce Business Need Insurance?
One of the most important questions many new online entrepreneurs overlook is, Does your E-commerce business need insurance? Find out now.
“The new normal,” as people are calling the COVID-19 affected situation we currently live in, has changed many aspects of our lives, including the way we shop for products and services because of the country-wide store closures. People are now spending more money shopping online than ever before, resulting in a predicted 20% increase in online sales in 2020.
And this “online shopping” revolution has been going on for quite some time.
There are approximately 12 – 24 million e-commerce stores worldwide, with new ones opening every day.
This growth is due to technology making it extremely easy to start an online business. Even if you don’t have the resources to build your own selling website, you can still create an e-store using a platform like Amazon or Etsy, and you are ready to go. Another advantage is that online businesses are not restricted by geography, which makes their market very wide.
However, that also means that the risks they face are greater and quite unique. With the growth they are currently experiencing, it is essential that e-commerce retailers understand the myriad of liabilities also increasing with that growth.
Common Risks for E-commerce Businesses
Cyberattacks.
Cyberattacks are probably the most common risk for e-commerce businesses. E-commerce companies store a lot of customer information online, which makes them an ideal target for cybercriminals. Hacking, phishing, malware attacks – these are all potential threats that can result in identity fraud or credit card information theft.
Consumers trust e-commerce stores with confidential personal and financial data when they make their purchases, leaving the retailers in charge of securing the information on the platform. Retailers should implement layers of additional security and make sure to keep their systems updated at all times. It is also recommended that you monitor every transaction and instruct users to create strong passwords for their accounts.
Distributed denial of service or DDoS is another type of cyberattacks where attackers flood the website with unwanted requests and internet traffic that the server cannot accommodate, resulting in the store crash. This downtime can inflict damage to the business’s reputation and cause some severe financial losses.
Product Liability Issues.
Despite selling their products and services online, e-commerce businesses should also be aware of product liabilities, much like every other retailer. The risk of product malfunctioning and causing an injury to someone is something to worry about, whether you’re selling home appliances or software. If you fail to provide detailed instructions and warnings, you can again be held liable for any malfunction. Even if you are not selling your own product or services, you are still the distributor and can therefore be sued if anything goes wrong.
Storage and logistics.
Selling your products means that you probably have a place where you store those goods. Whether it’s a big warehouse or a spare room in your house, accidents that could result in property damage happen all the time. Unforeseen things like flood, fire, or a leaking roof, can cause a lot of trouble to your business, especially if you are unable to respond to your customer’s orders.
Intellectual property.
Ensure that images, product descriptions, logos, and similar things on your website don’t violate anybody’s intellectual property. If your e-commerce website allows third-party advertisements, you should also beware of the potential infringement on someone else’s intellectual property. Your company can be held liable for displaying those advertisements on its website, and you could find yourself in the middle of a tiring lawsuit.
What Types of Insurance Do You Need for E-commerce?
If you are still wondering whether or not you need insurance for your e-commerce business even after reading all this, the answer is simple – Yes, you do.
Any claim made against you can end up being very costly if you don’t have proper insurance coverage. Let’s break down what insurance policies you should look into:
General liability.
General liability is the primary insurance policy every business should have. It protects you from any third-party property damage or bodily injury claims. If somebody injured themselves while visiting your office and filed a suit against you afterward, this policy would cover your legal expenses, as well as potential medical bills.
Cyber Liability Insurance.
Companies conducting most of their operations online face an immense risk of falling victim to cybercrime. In fact, it is expected that a cyberattack on a business will occur every 11 seconds by 2021, so the significance of having a comprehensive insurance policy in place cannot be stressed enough. As an e-commerce company, you store a lot of confidential client data. They create accounts on your website, leave personal and credit card information, trusting you to keep it all safe. Even with all the security measures you can implement, there is still a risk of a cyberattack.
A comprehensive cyber insurance policy would cover all the potential legal, investigation, settlements, or penalty costs in case of a data breach that would compromise your customer information. Note that you might want to extend the policy coverage to a third-party liability as well, should your customer’s computer catch malware while using your platform.
Product Liability.
Given that the product you sell is often your primary source of profit, this policy is essential for your business. Whether it’s your product malfunctioning or a faulty design that can cause an injury to someone, or maybe an allergic reaction to some of the materials used; a child could choke on a small part, or somebody could get injured because of the inaccurate or incomplete instructions you provided. These are all realistic scenarios that could make up a potential lawsuit against your company. That claim may not be viable, but you would still need to cover the legal expenses, and that is where your insurance policy kicks in.
Responsibility is not limited to the manufacturer. Distributors can also be held liable for selling a faulty product. Make sure you are adequately insured wherever you are in the supply chain.
Commercial Property.
Property insurance covers not only the building where you store your products or equipment but also the inventory. It would reimburse your costs in case of a theft or any kind of property damage. It is important to keep meticulous records of your inventory because the insurer can only cover the replacement cost of the items, not their retail value. Suppose you run your business from home and potentially store your products there. In that case, you should know that your homeowner’s policy likely doesn’t cover anything related to your business, so you might want to consider obtaining commercial property insurance to mitigate all the associated risks.
Workers Compensation Insurance.
In most states, this is a clear-cut case – if you have employees, you are required to have a Workers’ Compensation insurance policy, with Texas being the only exception. Most online businesses tend to have a minimum risk of employee injuries, so the premium for e-commerce businesses should be relatively low. However, if you have manufacturing capabilities, or if your workers handle heavy machinery or carry large packages at a warehouse, your coverage costs will be higher.
How Much Will You Have To Pay For Insurance?
You may think that obtaining insurance sounds like a daunting and costly affair, but you should keep in mind that a single event can be devastating for a business if it’s not adequately insured. Like any other company, e-commerce businesses have unique exposures and needs, and it’s hard to say exactly how much you’ll have to spend to be properly insured. However, there are certain factors that will always affect your premium. A few key questions that will help you determine your overall insurance cost are:
How many employees do you have?
What kind of products or services do you offer?
What are the risks your business faces?
Have you had any claims in the past?
Summary
If you’re unsure about the liability risks that your E-commerce business may face, it’s important to seek professional help. An attorney can help you understand your legal responsibilities, make sure that the business attorney you choose has an understanding of legal responsibilities as they apply to E-commerce businesses.
