What is eCommerce insurance? Do you really need it? Here’s a simple way to understand it and learn about the best online insurance for your business.
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Spott recently discussed insurance policies with a large eCommerce company. When asked about their current insurance provider, the company’s CFO replied, “I don’t know, I just pay some guy a lot of money.”
Let’s elaborate on “some guy.” And “a lot of money.”
Yes, liability insurance can be an intimidating subject to tackle. You’re thrown into a sea of “legalese” and expected to swim like a pro. But it’s worth learning how to dive in. Insurance, after all, is one of the pillars that keeps eCommerce businesses afloat.
eCommerce insurance is actually:
Can save your business
Required to sell on Amazon, Walmart, and other online marketplaces.
(Not many know this one)
Even though online business stores have less physical interaction with their clients like brick and mortar shops, they still need to be protected from unforeseen situations that can lead to potential lawsuits, accidents and other unpredictable events that can spell disaster.
If we boil it down to the absolute core: Insurance protects your business from risk.
If we boil it down to the absolute core: Insurance protects your business from risk. Having eCommerce insurance in your pocket is the difference between “having an umbrella over your head” and the catastrophe of “total loss.” Think of having eCommerce business insurance like an insulating coffee-cup sleeve: when you’re holding boiling-hot water, the sleeve protects you from the burn.
Let’s get acquainted with some insurance policies that will most likely be applicable to your eCommerce business, so by the time you sit with a professional, you’ll be well versed with the lingo.
Shall we dig in?
Where does insurance for online business even begin?
It all starts with liability.
Liability insurances not only protect you from potential disasters but also help your business grow.
Having an eCommerce business does keep you safe from situations most traditional brick-and-mortar businesses cannot escape such as slip-and-fall accidents or property damage. But online retailers are not risk-free.
To get the best coverage, you want to know all the options available as thoroughly as you can before you go to a broker.
Here are a few examples for the types of risk that online businesses face and the types of eCommerce business insurance that will have your back:
- A product malfunctions and injures a client or damages their property, and/or you are facing any type of lawsuit, Type of insurance recommended: general liability.
- Merchandise/inventory gets stolen — whether at your physical business location, while in transit or at your supply warehouse. Transit insurance. (Aka inland marine insurance.)
- Failing to deliver a product/service on time due to a vendor or supply chain issue, or other cases that can be interpreted as breach of contract. Professional liability insurance.
- Exposure of customer information due to website data breach. Cyber liability insurance.
How do I know which insurance coverage is best for my online company?
It’s all about liability.
Any broker or insurance professional will look into the nature of your business, calculate its risks, then guide you to the best insurance for your online business.
Right off the bat, you will notice that almost every online company has “the mother” of all insurance policies:
GENERAL LIABILITY INSURANCE
General liability insurance is the best fit for most business owners because it helps protect them from risks they face in many everyday situations such as injury, property damage, and disaster.
Here’s an example from real life: let’s say you’re having a party, someone has one too many, slips and breaks his arm right there in your living room. Homeowner’s insurance covers you, should that person sue you for getting injured on your property.
Now let’s translate that to your eCommerce business.
Let’s assume you’re selling something as simple as tennis balls. If a customer plays with his kid and injures him – or if the kid somehow sinks his teeth into the ball and chokes on the piece he bit off, your business is now subject to a lawsuit. Even if you prove that your product didn’t harm that person, you still have to spend the legal fees to prove your innocence and get out Scott free.
General liability covers all that.
General liability insurance is the best fit for most small business owners because it helps protect them from risks they face in many every-day situations such as injury, property damage and disaster.
WHAT GENERAL LIABILITY COVERS – AND HOW.
- Product liability covers damages caused by a defect in the purchased product, failing to supply the proper labeling, and even design flaws.
Personal Injury: Let’s say your online business sells soap. If a client has an allergic reaction to one of the ingredients and sues you, general liability insurance will cover all medical and legal costs.
Property damage: Another example: your company sells coffee makers and as your client connects one to their socket at home, it explodes and burns their wall. This is considered property damage. General liability will cover the medical costs and legal fees of all these cases. CheckZout the case of the burning laptop.
- Personal and advertising injury: When a third party sues your business for reputational harm: libel, slander, malicious prosecution, or even wrongful eviction and privacy violation, general liability insurance will cover all legal costs and trial expenses. This also includes advertising errors should you face a copyright infringement lawsuit. In this scenario, let’s say one of your colleagues or employers publishes a promotional learn-to-paint-from-home article on your website and writes up a slanderous statement about a competitive online painting teacher. If the competitor reads the article and sues your business, this policy will cover any legal fees and settlement costs associated with this case. All defense costs, regardless of whose fault it is, are covered. That includes worldwide coverage on damages that occur in the United States, US territories, Canada as well as other areas where damages occur while being away on short periods of travel.
- Direct body injury: If a third party claims bodily injury due to interacting with your business, medical payments will be covered. In this case, let’s say you run that online painting course and you deliver the canvases and paints directly to your client’s home. If a delivery driver visits your home or supply warehouse to drop off a load of canvases, trips over a gardening hose that was sticking out of the grass, and breaks his arm — the general liability insurance will cover the medical bills, legal fees, or settlement costs connected with this incident.
Amazon insurance requirements
If you assume that if you sell on Amazon and your client accidentally gets injured by one of your products, that Amazon will cover the damage… think again.
Amazon will not take this responsibility so it’s in your own interest as a business owner to have your back covered.
Amazon requires sellers to have business insurance of $1M in coverage. If you just started your online business and have become a Pro Merchant, you need liability insurance as soon as you cross the $10,000 line. General liability is an eligible insurance to sell on Amazon.
It’s a little tricky to find it, but if you go to “program policy” and scroll down almost to the bottom, you will find “Pro merchant insurance requirements:”
“Under section 9 of the Amazon Services Business Solutions Agreement, you are required to obtain and maintain commercial liability insurance within 30 days after exceeding $10,000 in gross proceeds in sales in one month on Amazon.com, or if otherwise requested by us. You may purchase either commercial general, excess, or umbrella liability insurance. When you decide on an insurance, your policy should cover all products you list for sale on Amazon.”
Update: Since this clause in Amazon’s Service Business Solutions agreement was added – things have changed, as they always do when it comes to Amazon’s TOS. But fear not, that’s why we’re here, to keep you constantly updated!
Some users have been calling us up, reporting about mails they received from Amazon demanding they acquire liability insurance even though they have yet reached $10,000/M! Amazon’s internal calculations are unpredictable as well as non-transparent. So be warned: if your business makes under 10K – you may get that same mail, demanding proof of insurance in order to continue sales on Amazon.
However, Amazon isn’t entirely out of the picture. They will cover claims under $1,000 (as most claims over $1000 usually lead to lawsuits) and not demand reimbursement from sellers – as long as they adhere to Amazon policies and hold a valid insurance. This way Amazon protects the consumers as well as the sellers.
According to Amazon policy: “ Claims under $1,000 account for more than 80% of cases in our store (i.e. Amazon), and Amazon will bear these costs and not seek reimbursement from sellers who abide by our policies and hold valid insurance.”
The way it works: when a third-party files a claim, Amazon looks into the case, proves its validity (whether legit or fraudulent,) then mediates a resolution between the sellers, the customers and your insurance provider.
How much does general liability insurance cost?
Like any insurance pricing, it’s product dependent. If you’re selling knives, your liability will be higher than if your eCommerce store was selling fluffy cotton wool balls. Additional calculations will include:
- How new is your business? The longer you’ve been around, the lower the risk. The cost depends on your years of experience.
- Where is your business located? If your storage facilities are earthquake or flood prone, the risks will be higher and also the cost of the policy.
- Because Amazon largely demands product liability insurance, your quote will also be based on your estimated annual revenue. The average cost is typically around $500-$1,000 per year.
Other types of insurance that might be applicable to your business:
In 2017 one of the biggest ransomware of all time,“wannacry ransomware cyber attack” made headlines. Around 200,000 computers were infiltrated in over 150 countries. The outbreak cost various industries about $8B.
Cyber liability protects businesses from data breach and ransomware. If your eCommerce website is breached and hackers release protected credit card information, this type of insurance will help with the legal fees spent dealing with the customers, the investigation of the incident and third-party lawsuits.
Transit insurance: (aka inland marine insurance)
Let’s say you sell bird-feeders and you store them in a warehouse. This type of insurance will cover any damage caused to the bird-feeders should they be damaged en route by an accident, or as a result of theft, vandalism and acts of god such as weather issues.
This type of policy will replace the bird-feeders whether damaged or stolen.
When a dissatisfied client sues you over an error made by your business, such as negligence which caused a decrease in his business, professional liability insurance will cover the cost of legal defense, including the cost of hiring a lawyer.
This includes work mistakes, oversights, undelivered services and missed deadlines.
Still in the fog?
No worries. Call or have a sit-down with one of our professionals. We will be happy to explain what kind of insurance can best help protect your business.
We pride ourselves for being Spott on.