Understanding the Unique Risks and Insurance Needs of Ecommerce Businesses
No one can deny that the arrival of ecommerce has had a huge impact on our society, making it easier than ever for people to buy and sell all imaginable products and services without having to do so at a particular physical location. And as is the case with anything new and revolutionary that occurs, the invention often brings with it new perils and risks that may not have existed prior to its invention.
Ecommerce sellers can reach a worldwide audience and aren’t restricted by geography – as they were in the world of brick-and-mortar retail – but being able to cast that net wider than ever before increases the business’s liability as well. Ecommerce is a unique industry so it’s no surprise that the risk profile of this industry is equally unique and nuanced.
The fact that the ecommerce industry is growing at an incredibly fast rate is yet another reason for e-retailers to make sure that they are well prepared for the many risks that can arise from such rapid growth. According to recent studies, retail ecommerce sales will increase to $4.058 trillion in 2020 and will make up more than 14% of total worldwide spending.
One of the main reasons behind this fast growth of the industry is that ecommerce is incredibly easy to become a part of as a businessperson. Even if you don’t want to go through the hassle of putting together your own ecommerce site, there are third-parties such as Amazon, Alibaba, and Etsy who provide you a platform to sell your products.
With so many new, somewhat unexplored business models being created from the rapid growth of ecommerce, it’s easy to understand how joining such an industry as a business owner comes with a set of specific business risks that you might not have encountered earlier, especially if you’re coming from a traditional retail background.
The Unique Risks of Ecommerce
Certainly, not everything is completely different when comparing ecommerce and traditional stores. There are risks that both business models share and there are some that can be avoided by going online, like the risk of customers slipping and injuring themselves in your physical store, for example.
But the introduction of the Internet as the bridge between sellers and buyers and the new risks that come with the arrival of this infrastructure cannot be downplayed.
When it comes to cyberattacks, ecommerce is one of the most besieged industries, with 32.4% of all cyberattacks targeting this industry. Ecommerce websites are a goldmine for sensitive information, especially buyers’ credit card information. Data breaches in which this sensitive, personal information is leaked, stolen, or used are one of the greatest risks that businesses face. Another common risk is a distributed denial of service (DDoS) attack in which hackers will flood an ecommerce website using botnets in order to crash the store, which will obviously lead to downtime, loss of revenue, and unhappy customers as well.
Believe it or not, causing damage to third-party computer software, networks, or data is also a real risk. For example, if the company’s online store or email client was somehow infiltrated by a virus and, as a result, a customer’s computer suffered damages, there could be grounds for a lawsuit against the ecommerce business.
Product Liability Issues
Much like regular retailers, ecommerce businesses also need to worry about product liability issues because any product or service sold can malfunction and result in some type of injury whether you’re selling toys or software.
The most common product liability claims result from defectively manufactured or designed products, or a failure to provide adequate warnings or instructions for the product. It should be noted that these issues can affect your ecommerce business even if you are selling products and services that were created by others. As long as you are in that chain of distribution, claims can be filed against you if there’s something wrong with the product.
Professional Liability Concerns
Since most transactions and deals in ecommerce are made online, there are usually contracts that are entered into and promises that are made before the transaction occurs. So if your ecommerce business made a mistake or delivered products or services that were not up to specifications in terms of how they worked, or when they arrived, you can be sued if your actions in any way resulted in your customer losing money.
Something ecommerce businesses need to do is gather information about their clients, customers, and visitors. If you are not doing that in a way that is clearly stated and transparent, you run the risk of liability for infringement, invasion, or interference with rights of privacy. The arrival of GDPR regulations in Europe, in addition to existing US Federal and State laws that protect the privacy rights of all online citizens, has made it incredibly important for all websites to be very transparent and upfront about what type of information they are taking from visitors, even those who have no intention of buying anything from the store.
Intellectual Property Infringement
Intellectual property is another area in which the complex business models of ecommerce can result in risk you might not even consider. Even if you are insured properly against the risk of infringement of patent, trademark, copyright, right of publicity, and so on, there are gaps that arise from the nature of ecommerce advertising. For example, an ecommerce store could face liability related to a third party’s advertisement that is found on its website. If the advertisement is infringing on some other party’s intellectual property and you are allowing that advertisement to be featured on your website, it could be your problem as well.
Highly-Publicized Examples of Insurance at Work for Ecommerce Retailers
- A mother filed a lawsuit against popular retail site Etsy after her son was strangled and killed by an item purchased off of the website. The child was strangled to death when a necklace he was wearing around his neck tightened and did not release. See: Ecommerce site Etsy sued by mom whose son was strangled to death by teething necklace
- Tri Huynh, a former director of business development at Walmart, filed a suit alleging that he was terminated by the company under false pretenses in 2017, adding that the retailer issued misleading ecommerce results. See: Former Walmart exec claims retail giant issued misleading ecommerce results in battle against Amazon
- Art.com allegedly accessed Gotham City’s servers illegally and changed the security passwords and ownership credentials to prevent Gotham City employees from accessing email or company files. The lawsuit alleges that Art.com copied and altered Gotham City files, including files containing information about consumers who shop at Gotham City and stole computer code and other intellectual property. See: Art.com sued for allegedly stealing information from ecommerce retailer
- An Israeli customer filed a $101 million application for a class-action lawsuit against eBay claiming that unexplained gaps of up to 90% were found between the displayed price of the shipment before the order and the price of the shipment price after the order was made. See: Application For $100 Million Class Action Lawsuit Against eBay: The Shipment Increases After The Order
Recommended Ecommerce Insurance Coverages
Having discussed some of the more unique risks related to ecommerce, it’s also important to know that online shopping businesses still need to address more common risk factors that they share with just about every other type of business.
Here’s a list of some of the most important insurance coverages all ecommerce businesses should secure in order to cover both everyday, common risks and those specific to the industry.
General Liability Insurance: Usually considered the foundation of any risk management program, general liability insurance covers third-party bodily injury and property damage claims. If you plan on leasing an office, you’re going to need general liability coverage. If anyone visits your office and suffers an injury, this will cover your legal obligations and other potential expenses. However, if you are initially operating out of your home, do not presume your Homeowners policy will protect you. Homeowners insurance policies have restrictions and exclusions regarding business activities. The best option is securing a separate policy for your commercial venture to assure the business is properly insured.
Product Liability Insurance: As stated earlier, product liability insurance is essential coverage for ecommerce businesses because the products are at the center of your operations. Any product that you sell creates a potential for a lawsuit if a customer is injured while using that product. Manufacturing defects, design flaws or improper/inaccurate instructions or warnings can generate severe liabilities for any ecommerce business, regardless of your role in the distribution chain. Consequently, purchasing product liability insurance as part of the general liability policy is a prudent business decision that should not be taken lightly. Also, it is important to note further products liability insurance is not included under a Homeowners policy.
Your insurance broker needs to understand your business process so that an accurate picture is given the insurance company regarding the risks associated with your product.
In this regard, make sure that your suppliers are properly insured, providing you a certificate of insurance that includes your interest as an Additional Insured before any business is conducted. Making certain that your suppliers are properly insured gives you an extra layer of protection should issues arise concerning your product. Your ultimate insurance cost will be directly impacted by the amount of risk you clearly transfer back to your suppliers.
Cyber Insurance: Ecommerce and other online-first businesses are the most vulnerable to risks that the proper cyber liability policy can protect against. Since all ecommerce businesses process transactions and collect a great deal of personal information from customers, they are a prime target for hackers and cybercriminals. If you collect any personal information from your clients or partners; if you require people to log in to your website to make purchases; if you integrate with other systems and share client information with them, you need cyber liability insurance. Since all ecommerce businesses process transactions and collect a lot of personal information from customers, they are a prime target for hackers and cybercriminals. All potential lawsuits, fines, penalties, settlements, and discovery and investigation expenses arising from a cyberattack or data breach will be covered by a comprehensive cyber insurance policy.
Technology Errors & Omissions Insurance: Product liability, cyber, and technology errors & omissions can be considered as the holy trinity of coverages for ecommerce businesses. The combination of the products liability and cyber address situations involving physical injuries caused by your product, and the unauthorized disclosure of proprietary information, respectively. Rounding this out, technology errors and omissions insures against claims arising from the failure of your product to perform its intended purpose or any errors related to the services you offer in conjunction with your product. No matter where the issue originates and whether it’s directly related to your operations or indirectly to the technology involved in the process, you are at risk from claims. Consequently, the need for technology errors and omissions to complete your insurance program is critical.
Employment Practices Liability Insurance: If you have employees EPLI protects your company against claims related to workplace harassment, discrimination, wrongful termination, and similar issues.
Commercial Crime Insurance: Commercial crime insurance protects your company from potential crimes committed by your employees and third parties. In ecommerce, most of these crimes are related to embezzlement, fraudulent transactions and robberies involving your inventory while in storage or in transit, for example.
Directors & Officers Insurance: All startups, regardless of industry, should have D&O insurance to protect company leaders against lawsuits alleging a breach of fiduciary duty or mismanagement. It allows them to run the company aggressively and confidently without the fear of personal financial loss. Having D&O insurance will also assist in the recruitment process for strong leaders, assuring them that they will not be at risk while serving your company. In addition, maintaining this coverage can enhance the opportunity for you to attract venture capital to expand your growth potential.
Workers’ Compensation Insurance: State regulations require you to purchase workers’ compensation coverage if you have any employees. This policy will pay for all medical costs and lost wages resulting from an employee’s work-related injury. Usually, the cost of coverage for ecommerce businesses tends to be quite low, since most online businesses tend to be minimum hazards. However, if you manage a warehouse where employees carry large boxes and work with heavy machinery such as forklifts, then your workers’ compensation insurance costs will be greater.
Cargo Insurance: If you own a warehouse, rely upon a third party to store your goods, or ship your products directly to your customers and other distributors, then cargo insurance is definitely a coverage you will need. This coverage protects you from physical loss of inventory, while in storage or being transported.