More than 11 million e-commerce stores operate in the United States, collectively generating over $1.2 trillion in sales each year.
However, often these online retailers aren’t worried about leading the pack or storming the market. Instead, business owners are generally focused on creating quality products, finding a loyal customer base, and making ends meet.
As a result, retailers often put business insurance at the bottom of their list. If online selling is a hobby or a passion, why bother with the complication and expense of business insurance?
This piece explores some of the unique risks faced by e-commerce stores, such as cyber threats and product liability. It also examines the benefits of business insurance for online retailers and offers actionable advice to help you get insurance that protects your brand — without breaking the bank.
What Is Business Insurance for Online Retailers?
Business insurance for online retailers protects owners from financial risks tied to products, data, and operations. While this type of insurance is often a priority for brick-and-mortar stores, it’s just as essential for e-commerce sellers.
Consider a candle-maker who has stores on Etsy and Shopify and sells 50 candles each month. The candles are a labor of love; some are crafted by inspiration, while others are custom orders from customers.
Unfortunately, one of these candles has a defect. It burns hotter and longer than expected and causes a small house fire. The creator may face legal action for property damage and medical bills that could bankrupt their company. That’s where business insurance can help.
Understanding E-commerce Business Risks — And Why They Matter to Online Retailers
Small e-commerce operations face several risks, including:
- Cyber attacks: E-commerce sites may be targeted by cyber attacks that leverage vulnerabilities in website code, payment platforms, or other connected systems, which can put financial data, customer information, and intellectual property (IP) at risk.
- Data breaches: These incidents may occur if staff accidentally share confidential information or customers fall prey to a phishing scam. Loss of data can lead to both legal and regulatory challenges and financial damages.
- Inventory theft: E-commerce retailers still require physical inventory to ensure demand meets supply. As a result, they are at risk of inventory theft in the same way as brick-and-mortar stores.
- Shipping issues: If packages get delivered damaged or don’t arrive at all, e-commerce retailers are typically responsible for covering the cost.
- Platform requirements: Some e-commerce platforms, such as Amazon, require sellers to carry business insurance.
Essential Coverage Types for Online Retailers
There are four essential types of coverage for online retailers to consider:
1. General liability insurance
General liability insurance provides coverage for third-party claims, such as customer injury or advertising injury.
For example, if a visitor slips and falls in your warehouse, general liability helps cover the cost of their medical bills, instead of you paying out-of-pocket. Or, if your business mistakenly uses the copyright or trademark of another company in its advertising, general liability helps with covering legal bills.
This type of insurance is often mandated by online marketplaces such as Amazon.
2. Product liability insurance
Product liability insurance covers your business in the event that your products cause injury or damage because of defects or inadequate safety warnings. A GL policy can offer some coverage for products and completed operations, but a standalone product liability policy may make sense in instances where a business may have increased risks.
Consider a small business that makes bespoke lava lamps — yes, they’re making a comeback! — but doesn’t use large or obvious enough labeling to warn users that these lamps get very, very hot. If a customer gets burned by the lamp, they could sue for medical costs and distress, which could bankrupt your business. Product liability insurance reduces this risk.
3. Cyber liability insurance
Cyber liability insurance covers the costs of remediating a data breach, notifying customers that breaches have occurred, paying legal expenses, and managing business interruptions from cyber attacks.
One all-too-common example is ransomware. If businesses are hacked and their data is stolen and encrypted, the result can be days or weeks of interrupted operations, even if the data eventually gets returned.
Cyber insurance is also essential to meet legal and compliance requirements for customer data handling and privacy, such as those requirements in the EU’s General Data Protection Regulation (GDPR) and the California Consumer Privacy Act (CCPA).
4. Commercial property insurance
Commercial property insurance protects inventory, equipment, and business property stored at your home, in your warehouse, or in third-party facilities.
How to Choose the Right Insurance for Your Online Store
Assessing your business risks is the first step in choosing business insurance. For example, if you have a large warehouse for product storage, you have an increased risk of personal injury or inventory theft. If you’re a small online retailer with minimal stock on hand, your primary concern may be cyber attacks or data breaches.
It’s also important to consider what you sell and the market you serve. If any of your products carry potential injury risk, product liability insurance is a must. If you occupy the same space as more well-known retailers, make sure to invest in general liability insurance.
Before selecting any insurance provider, ask them these three questions:
1. What types of insurance would you recommend?
Once you have a sense of what insurance types you need, ask a potential provider and see what they say. If their suggestions are significantly different from competitors’, ask why.
2. How do I file a claim?
Make sure to ask about the claims filing process. Many companies now offer fully online claims processes, but the requirements to start your claim may vary.
3. What is covered? What is exempt?
Always ask about specific coverage options that are unique to your individual product. There might be coverage options that you are not even aware of. Also, make sure you ask about coverage exemptions, along with circumstances that may void your coverage. For example, you will want to know that you may not have coverage if you deliberately omit certain product risks.
How to Save Money and Avoid Costly Mistakes
To get the most from business insurance, you need to save money and avoid costly mistakes.
Smart ways to keep costs down.
Keep costs down with these strategies:
- Bundling policies: Combine multiple policy types into a business owner’s policy (BOP), which typically costs less than paying for policies individually.
- Raising deductibles: By raising your deductible, you can lower your monthly premium. This is especially useful for low-risk, low-occurrence events.
- Prioritizing risk management: Choose coverage that protects against costly risks, such as cyber attacks or unsafe packaging.
- Earning discounts: Look for providers that offer discounts on your insurance the longer you go without making a claim.
Because every business’s situation is different, you’ll want to speak with your insurance provider about what strategies are the best for your circumstances.
Common insurance mistakes online retailers make.
The most common mistake made by small online retailers is assuming that their homeowner’s insurance will cover online sales or business inventory. It almost always won’t. Products stored in your home for sale are not generally covered by your property insurance, and your homeowner’s insurance typically does not cover business cyber attacks.
Another common mistake is not carrying cyber insurance or carrying too little. Even “small” data breaches can have far-reaching consequences, especially if they include customers’ personal data or your company’s financial information.
Finally, business owners may take the first step of purchasing insurance, but forget to update their policies as sales volumes and inventories grow, leaving them with less coverage than they need. Your insurance needs will evolve with you and your business.
How to Get Started
Getting started with business insurance for your online store is a simple, three-step process:
1. Assess your risks.
2. Decide which coverage matters most for your business.
3. Get quotes from multiple providers.
Historically, this process was complicated and cumbersome, and it often involved making in-person appointments with insurance professionals. Now, getting coverage is simple, customizable, and can be done from the comfort of your own home.
Simply put? It’s easier than ever to take action and protect your online store.
Digital Sales, Real Risks: The Case for Business Insurance
Business insurance for online retailers helps protect against risks including cyber attacks, product liability, shipping issues, and physical injury.
Whether you’re a growing business with a warehouse and 20 full-time staff members, or a digital entrepreneur working from home, business insurance provides peace of mind and credibility with customers — at a price you can afford.
Review your coverage today and take the first step to protecting your online store. Get a quote today.