Ecommerce businesses have become an essential part of the broader economy. Driven by interest from both consumers and companies for more convenient and accessible shopping, more and more businesses have embraced ecommerce as part of their business model. US ecommerce sales, in fact, are expected to surpass $1 trillion for the first time in 2022.
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This huge increase in ecommerce opportunities, however, has come with an increase in the risks involved. Any business with an online presence is faced with a wide range of risks from the moment they set up their platform. The exposure to risk can come from any number of sources, from employee lawsuits to ransomware attacks. Newer and smaller businesses are especially vulnerable, since a single lawsuit or cyber attack can compromise their financial health and even lead to bankruptcy.
For that reason, ecommerce businesses have to obtain the right insurance coverage from the get-go to mitigate the potential risks and stay protected. Ecommerce businesses face challenges that are unique, since their business approach is focused on having a virtual presence in contrast to brick-and-mortar stores. Their insurance coverage, therefore, needs to be specifically tailored to those unique needs.
This guide provides an overview of the key aspects of insurance for ecommerce businesses in order to help business owners and companies make an informed decision about the right insurance coverage for their business. We will first look at what ecommerce business insurance is, and why it’s needed, and then discuss the key policies and costs involved in obtaining the right coverage.
What is Ecommerce Business Insurance?
Ecommerce business insurance is a type of insurance that is tailored to meet the unique needs of businesses that are online and engage in ecommerce. It is intended to cover losses due to any events or lawsuits that occur during the course of conducting business.
When it comes to insurance, ecommerce businesses are unique for two key reasons. First, their focus on online commerce makes their business operations fundamentally different from traditional brick-and-mortar businesses. Second, their business operations expose them to different risks, sometimes even greater risks, than their traditional counterparts.
Operating a business online, for example, increases the risk of exposure in comparison to stores that have a fixed number of operating hours. And while being online means that a business isn’t constrained by geographical limitations, there are other challenges such as shipping which can be a source of serious liability for ecommerce businesses.
Why Ecommerce Businesses Need Insurance
While ecommerce businesses face many of the same risks as traditional businesses, their reliance on the Internet adds more challenges and increases their risk exposure. There are several important reasons, both Internet-related and beyond, why ecommerce businesses need insurance:
- Cyber risks: Ecommerce businesses are frequent targets of cyber attacks, including ransomware attacks and data breaches. In fact, ecommerce is one of the top four industries impacted by cyber attacks, with a 37% increase in threats recently. Attackers are often looking to access private, personal information, such as clients’ credit card numbers. Another set of risks is due to damages caused to third-party software, networks, and data.
- Defective products: Defective products can be the source of serious liability when they lead to injuries to persons or property. The defects can be caused by the manufacturing or design of the products. Businesses can also be held liable if they fail to provide necessary warnings or labels, or if they sell defective products manufactured by others companies or individuals.
- Delivery concerns: Failure to deliver products or services on time can also lead to lawsuits. The same goes for lost deliveries. Such delays or losses can lead to even greater risk exposure if they result in a breach of contract.
- Privacy issues: All ecommerce businesses gather sensitive information about their customers and clients as part of doing business on the Internet. That information includes credit card numbers, contact information, and financial or medical data depending on the type of business. Ecommerce businesses that deal with such information have to abide by privacy laws, or otherwise risk liabilities due to infringement or invasion of privacy.
- IP and trademark infringement: Intellectual property and trademarks are highly complex issues, and ecommerce businesses risk exposure not only through their own actions, but due to the actions of third parties on their platform or store (such as through advertising or product sales).
- Reputational risks: Given the huge variety of businesses online, many consumers are understandably careful about which companies and online stores to do business with. Having solid insurance coverage lets everyone know that you are a legitimate and reliable business partner.
Key Insurance Policies for Ecommerce Businesses
Given the wide set of challenges and risk factors affecting ecommerce businesses, it’s vital for every business to have solid insurance coverage in place. The right combination of insurance policies will depend on the particular needs of your ecommerce business. Some ecommerce businesses, for example, deal more with third-party vendors than others do. The importance of shipping products also differs depending on what kind of products and services you sell in your online store.
Businesses also have to take into account different industry regulations as well as legal requirements that are different according to each county or state where the business is located. International shipping can add another layer of risk and potential liability to your business. Every ecommerce business needs to devote the necessary time and attention to identify the potential sources of risk they face so that they can effectively determine which policies they need.
All ecommerce businesses, however, should consider a key set of policies needed to ensure the best coverage possible. The most important policies include the following:
General Liability Insurance
One of the most common and important types of business insurance, general liability insurance provides financial protection to businesses from lawsuits or damages that occur during business operations. General liability insurance will cover legal fees, settlements, judgments, and medical payments in the event that your business unintentionally causes bodily injury, personal injury, property damage, or advertising injury. Ecommerce businesses that lease offices, for example, need this type of policy.
Product Liability Insurance
A crucial policy for ecommerce businesses, product liability insurance protects an online store from claims by a third-party related to property damage or bodily injury caused by a product sold or made by your company. This type of insurance protects your business against product defects due to manufacturing or design flaws, issues related to inadequate instructions, warnings, or labels.
Cyber Liability Insurance
Ecommerce businesses are more vulnerable to cyber attacks than most other organizations, and therefore require solid cyber liability insurance. Cyber insurance protects your ecommerce business against losses due to hacking, data breaches, ransomware attacks, and other types of cyber threats. A solid cyber insurance policy will cover costs from lawsuits, fines, penalties, settlements, and investigation expenses resulting from cyber attacks and data breaches.
Technology Errors & Omissions Insurance
Tech E&O insurance is a specialized type of insurance product designed to protect against specific professional liability risks faced by people in the tech industry. For that reason, it should be considered an essential policy for ecommerce businesses.
Employment Practices Liability Insurance
Employment practices liability insurance (EPLI) provides ecommerce businesses with financial protection against lawsuits by employees (current, past, or prospective) due to wrongful treatment such as in the form of discrimination, harassment, or other issues related to employment. An EPLI policy will reimburse you for the cost of defending a lawsuit and will cover any judgments and settlements.
Workers Compensation Insurance
Also known as workers comp, workers compensation insurance is required in almost all states and for most businesses with one or more employees. Workers comp provides financial and medical assistance to employees and/or their survivors for work-related injuries, illnesses, or death.
Directors and Officers Liability Insurance
Directors and officers liability insurance (D&O) is an important policy for protecting the leadership of ecommerce businesses, including startups. D&O protects the directors and officers of a company from personal liability while they perform their roles as directors and officers. This is an important policy to attract and retain talented leaders, and is required by most venture capital and private investment firms.
Commercial Crime Insurance
Commercial crime insurance protects a business against financial losses due to theft, burglary, robbery, forgery, and fraud. The policy protects your business from crimes committed by both employees and third parties. For ecommerce businesses, commercial crime insurance is especially important in providing protection against embezzlement and fraudulent transactions.
Business Interruption Insurance
Also called business income insurance, business interruption insurance protects a business against lost profits due to damaged or destroyed property. This policy will protect your ecommerce business in the event of a disaster such as a fire or flooding.
Costs of Ecommerce Business Insurance
The cost of insuring your ecommerce business will ultimately depend on the package of policies that you decide on. There are, however, several factors that have to be considered when determining the cost of your insurance:
- The number of insurance policies
- Limits of policy coverage
- Prior claims history of the business
- Location of the business
- Types of products and services sold by the business
- Number of employees
- Projected revenue over the next year
- Cost of business assets
As a general rule, the greater the risks faced by the businesses and the more coverage it needs, the higher the insurance cost will be. An ecommerce business that consists of just one person working from home, for example, will have significantly lower insurance costs than a business with several employees and/or locations.
Choosing the Right Insurance Provider
It can seem like a daunting task for small ecommerce businesses in particular to navigate all the legal and financial issues when looking for the right insurance coverage. That’s why choosing the right insurer is so important. All ecommerce businesses should take the time to research and carefully select a provider they can trust who can be a reliable partner for their business over the long term.
In choosing an insurer, it’s important for ecommerce businesses to consider the types of risks they are facing, and what policies they will need. Businesses should request quotes from various insurance providers for the policies they need, so that they have as wide a selection of choices as possible. There are several factors to consider when comparing providers, such as the type of coverage provided, the costs, any reviews, and the type and level of customer support offered by providers.
The nature of ecommerce business also means that your insurance provider should have solid experience and expertise in working with small businesses and startups that require digital solutions. Based on our research here at AdvisorSmith, one particular standout is Embroker.
Embroker has become a leading digital insurance brokerage by combining digital and technology solutions with broker expertise, which has allowed the company to provide radically simple, cost-effective business insurance. For that reason, the company recently came out on top in our recent roundup of the best insurance companies for startups. We were particularly impressed by Embroker’s startup package, and its excellent customer service.
For ecommerce businesses, Embroker’s small business focus is particularly important. The types of coverage offered by the company are impressive, and include the policies we discussed above as essential for comprehensive risk management for ecommerce businesses.
Takeaway on Insurance for Ecommerce Businesses
The ecommerce industry is sure to remain a key driver of growth and innovation in the coming years. Ecommerce businesses have contributed significantly to the success of the economy at large, and the expansion of the ecommerce market has brought exciting new opportunities for many business owners looking to innovate and grow their own businesses.
Such growth and innovation, however, also comes with a great deal of risk-taking. Ecommerce businesses looking to grow and innovate need to manage those risks effectively through the right insurance policies. By doing the necessary research, and with the help of a trusted insurance provider, ecommerce businesses can secure the right coverage and implement an effective risk management strategy.