Ecommerce Business Insurance: What Coverages You Need
Ecommerce business accounts for a significant part of the economy. In 2022, it is expected that ecommerce sales will cross the $1 trillion mark in the United States alone.
Although traditional retail businesses do frequently have ecommerce portions of their business, this article will focus on the needs of businesses that primarily handle transactions online.
If you run a traditional retail store and are researching how to cover your ecommerce risks, we suggest you read this article and "Retail Business Insurance: What Coverages Do You Need?" together.
If you have specific questions, you can always give us a call and speak with one of our experts.
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What risks do ecommerce businesses face?
Ecommerce businesses face a unique set of risks. Additionally, ecommerce businesses vary in how they do business—from how they store inventory to what online services store their payment data.
That being said, over the years we have noticed there are some common protections that most ecommerce companies need:
Cyber/Data Breach Risks
Transacting business online means there is more risk for a cyber-attack to occur. Whether customer data is stolen or a ransomware attack locks the staff out (rendering the company inoperable), ecommerce businesses are at more risk for this type of claim than many traditional retail counterparts.
For example, if you transact business 100% digitally and all your computers are down as a result of a cyber-attack, you are losing 100% of your revenue during the duration.
Inventory Loss Risks
The products your ecommerce business sells might be physical goods. Traditional retail stores have a good pulse on the risk of inventory losses, but many ecommerce businesses do not have a first-hand understanding of the risks of theft, damage while the property is in transit, natural disasters, and other incidents.
For many small businesses, a large inventory loss (and the subsequent loss in income) can be a catastrophic blow to their financials. This kind of loss can set back the company many years, if not cause it to close its doors entirely.
Products Liability Risks
If the product you sell to a customer causes them harm, you could get involved in a subsequent lawsuit. If you purchased the product directly from a U.S. supplier or distributor, chances are you will ultimately be dismissed from the lawsuit—but you will still need a legal team to fight for you.
If you imported the goods yourself from a foreign company or manufacturer, you can absolutely be on the hook for a products liability claim.
Let’s say you are an ecommerce business that sells tools, materials, and equipment for contractors online. You import these items from foreign manufacturing companies. You sell a customer a ladder, and the customer falls off the ladder due to a manufacturing defect. Since the customer cannot sue the manufacturer directly in the U.S., you could be responsible for the resulting legal liability.
This coverage is very inexpensive for ecommerce stories, and it’s something that we always suggest purchasing. We have seen multiple claims on this coverage throughout our years of insuring ecommerce.
Supply Chain Risks
Many ecommerce businesses have gotten their product from a single (or very few) supplier(s). As we have learned from the shortages in the past couple of years, when the supplier has an issue, your business has an issue.
We’ll make it clearer: If your sole supplier cannot supply your goods, your business does not have any goods to sell.
If you are unable to source the product or raw material needed to sell your product, then you are taking a significant risk in your business. Not only would you have no sales, but your customers might find other companies that can meet their demands, resulting in the loss of future income.
What insurance policies can address these risks?
Commercial General Liability
A commercial general liability policy is a necessity for all ecommerce businesses. Its primary function is to protect your business from incidents or allegations that your negligence caused your customer—or someone who interacted with a product you sold—bodily injury or property damage.
Additionally, this coverage can also extend to business partners that you work with. For example, if you are shipping out a battery-powered device that causes a fire in your warehousing partner's facility, the commercial general liability policy would usually cover this incident.
Cyber Liability Insurance
Transacting all your business online means you are more exposed to a cyber-attack. An attacker may aim to steal information about your clients (credit card information, addresses, and so on) or your employees (bank account info, Social Security numbers, employment files). Or attackers may want to shut your business down to extort you for money. Whatever the nature of the cyber-attack, a cyber liability policy can help you keep your business running.
- A cyber liability insurance policy can:
- Hire an expert team to negotiate with cyber-attackers
- Pay for lost net income and items such as payroll while you can’t conduct business
- Pay for notification and credit monitoring for the victims of your data breach
- Pay to replace ruined computer systems resulting from the cyber-attack
- Pay for a forensics team to investigate the extent of the attack
- Pay for PR expenses to help minimize the reputational impact of a cyber-attack
Property Insurance
As an ecommerce business, you most likely have a significant amount of capital tied up in inventory to support future customer orders. There are always risks inherent to having significant value invested in assets like your inventory, such as natural disasters, theft, and fires.
Commercial property insurance can cover your property from these events. There are three coverages that you need to purchase on your property insurance policy:
Inventory Coverage: Insurance that covers your inventory from loss is called "Business Personal Property," and it covers your property at a location listed on the insurance policy. This is typically where you will cover property in your warehouse (or where you are warehousing your goods). On this coverage, you disclose the replacement cost value of all the property at a specified location, and the insurance company agrees to replace that property if it is damaged in a covered claim.
Business Income: The monetary loss of your property is just the beginning of your problems in a large claim. Usually the bigger issue that arises is that you were going to sell the property generate income for your business; that income would in turn support loans, payroll, marketing expenses, technology subscription costs, and other things.
Business income coverage covers your net income while you are restoring your business from a claim (reordering stock, making other arrangements for warehousing, etc.). This allows your business to survive and continue as normal while you get back up and running.
Dependent Business Income: If your business is dependent on a certain supplier or manufacturer, dependent business income coverage extends business income to covered events that happen to your key supply chain partners. For example, if a manufacturer that you rely on experiences a fire that causes a delay for a key product that you sell, dependent business interruption would pay your lost net income while your supplier makes repairs and restarts operations.
Best Insurance Companies For Ecommerce Businesses
Surprisingly, there aren't as many insurance companies insuring ecommerce businesses than you would think. When we are working with customers on placing their insurance, these are the common insurance companies that we usually provide quotes for:
The Hartford
The Hartford is a great place to purchase insurance for your ecommerce business. They can accommodate those businesses selling lower-risk products (clothing, home decor, office supplies, and so on) that need customized and comprehensive coverage. They can offer high property limits and add additional coverages such as cyber. We highly suggest this carrier if your products fit within their risk guidelines.
Hiscox
Hiscox offers a great low-cost policy for those ecommerce businesses looking to purchase a more bare-bones policy. Like The Hartford, Hiscox focuses on insuring businesses that sell lower-risk products. That being said, Hiscox does not offer those higher property amounts and does not offer all the extra coverages a business might need or require.
Berkley Aspire
Unlike The Hartford or Hiscox, Berkley Aspire focuses on businesses that sell higher-risk products (some examples are imported goods, firearms, electric scooters, automobile accessories, and children's toys). They are able to offer high limits of insurance and cover the core risks these businesses face.
Summary
Each ecommerce business will have unique requirements that will depend on the products that it sells, how it handles inventory, and how it handles selling (through Shopify, Amazon, eBay, or a custom website, for example).
Still have questions? You can give us a call to speak with an expert or get started with an online quote immediately.
About The Author: Austin Landes, CIC
Austin is an experienced Commercial Risk Advisor specializing in property & casualty risk management for religious institutions, real estate, construction, and manufacturing.