Protecting Your Retail Business with the Right InsuranceInsurance Explained
Being a retailer can be a very rewarding experience. The concept of being able to offer people products that they want—products that could make their lives better in some way or simply bring them joy—makes retail a very satisfying profession for some.
The interactions that are had and relationships that are formed between businesses and customers in retail are also very unique and often gratifying for both sides when all goes well.
But at the same time, owning and successfully running a retail business is certainly as challenging as it can be fulfilling, especially in times of economic downturn and uncertainty. The COVID-19 crisis is impacting businesses big and small in many different ways, and unfortunately, retail and hospitality are probably the two industries that have been hit hardest by the pandemic.
However, one of the best things about retail is that it is an industry that has been changing with the times and using technology to make its business model more fluid. The incredible rise of eCommerce is certainly one of the main ways in which the face of the retail industry is changing, and it’s also a big reason why many retailers have been able to stay afloat in economically uncertain times.
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Analyzing the Risks and Costs for Founders
This report, derived from over 2,000 aggregated and anonymized Embroker transactions, is broken down by different startup funding and revenue stages. All the data represents actual premiums paid and policy options chosen at the time of purchase.
In order to survive in this rapidly changing business environment, every retailer needs to find ways to constantly adapt their business model to the myriad and constantly-changing risks that their industry faces while making sure that they are continuing to meet the demands of their customers, the profile of which is also ever-evolving.
Does Every Retail Business Need Insurance?
No matter what type of retail business you’re running, there are going to be certain risks that your business faces that you can transfer to a third party by purchasing commercial insurance.
Just as business models evolve, so do the risks that are associated with them. While brick-and-mortar retailers have to worry about wet floors and slip-and-fall accidents, online retailers don’t. But they do have to worry about cybercrimes, which is a risk that’s directly tied to the eCommerce business model’s reliance on the Internet.
No matter what type of business you are running, being fully aware of the risks that you face is imperative. Putting together a quality risk management plan will allow you to avoid and reduce risks when possible and transfer the potential financial damage of some potentially unavoidable risks to your insurance carrier by purchasing coverage.
In order to successfully do that, you need to be aware of the types of risks that retailers face most commonly and what insurance policies will, if purchased, provide coverage in the event that these potential risks become realities.
Common Retail Risks: Which Insurance Policies Can Help?
While there might be some risks that brick-and-mortar retailers face that online stores don’t and vice versa, there are certainly many that could potentially affect both business models. As we’ve already noted, owning any type of business comes with inherent risk, which is why analyzing potential risks and formulating a quality risk management plan is so important.
Let’s take a look at some of the major risks that retailers face most commonly and how some of the potential damages related to these risks can be neutralized or at least assuaged with the help of insurance.
According to the National Retail Federation, theft and fraud cost retailers $62 billion in 2019. Shoplifting has always been a problem in retail, one that business owners have invested heavily in over the last several decades to curtail by installing security systems such as surveillance cameras and sensor-based product tags.
As far as insurance is concerned, a good commercial property insurance policy for retailers protects not only their physical stores but also all of their equipment and inventory. If you’re looking to buy the right insurance as a retailer to protect yourself from theft and other losses, make sure that your property policy covers your inventory as well.
But it’s also important to remember that it’s not just visitors who steal things from retail stores. Employee theft can also result in significant losses in retail. That’s why it’s also a good idea to purchase a commercial crime policy. This policy protects your business from crime-related losses resulting from petty theft, fraud, and burglary committed by both your employees and outside entities.
Even if you’ve moved your retail operations entirely online, you’re still not protected from theft. In fact, the chances of someone stealing from you are actually going to increase thanks to the rapid rise of cybercrime.
According to the FBI’s 2019 Internet Crime Report, cybercrime cost individuals and US businesses $3.5 billion in losses last year. The reason cybercrime is so effective is that it can come in a huge variety of forms and it’s hard for businesses to prevent or even know how to identify all of the various forms of cybercrime that exist.
Social engineering and phishing attacks are incredibly hard to combat because they attempt to trick you and your employees into providing cybercriminals access to your computer systems. These types of cyberattacks often occur via email, asking you to click on a link or download a file that would allow the cybercriminal to compromise your database.
Other times, cybercriminals will directly attack you by trying to hack your website instead of trying to trick you into giving them access. Data breaches resulting from hacking attacks can cost your retail business an enormous amount of money, especially if the data of customers and partners has been compromised as well and they decide to file a lawsuit against you because of it.
Malware attacks might even be the most common and difficult-to-stop type of cyberattack that eCommerce and other online retailers face because they too come in a huge variety of forms such as adware, spyware, ransomware, and more, making them hard to identify and defend against.
Because of the imminent threat of cybercrime, it’s safe to say that unless you’re a dollar store that only takes cash in exchange for your merchandise, your retail store probably needs a good cyber insurance policy. If your retail store processes credit card payments, keeps a database of customer information, stores partner data online, sells products online, you’re going to need cyber liability insurance.
A good cyber liability policy will include first and third-party coverage. First-party coverage will pay for damages to your data and the cost of restoration, the expenses of notifying all those affected by a cyberattack, loss of income, public relations expenses, and the expenses of installing processes that will help prevent similar attacks from reoccurring.
Third-party cyber coverage will cover regulatory fines if you are found guilty of breaking data privacy laws and regulations and claims related to network security issues and electronic media liability. Cyber insurance will also cover defense costs and eventual settlements if a party that was affected by the cyberattack decides to take you to court.
Another tricky aspect of the retail business is that you can get sued for selling defective products even if you didn’t produce them. This is why product liability insurance is another important coverage for retail businesses.
This coverage will protect your business in the event that someone files a claim related to personal injury or property damage that resulted from a defective product that was either produced, distributed, or sold by your business. A complete product liability policy will cover your business in the event of claims related to product defects, product malfunction, and even “failure to warn” claims related to deficient warnings or instructions that came with the products.
Due to the often astronomic cost of defending your business from such claims, even the smallest retail business should purchase a product liability policy if they are distributing or selling products, whether the products are their own or manufactured by a third party.
We’ve already discussed property insurance and how retailers should purchase this coverage to protect their inventory that could potentially be stolen. More obviously, commercial property insurance needs to be purchased in order to protect all of your business’s property from potential damages.
Property insurance covers losses related to natural disasters, fires, weather events such as flooding, power outages, and other events that can lead to property losses.
Buildings being destroyed in an electrical fire or ruined by vandalism are obvious risks, but there are many different types of property risks to think about depending on the type of retail business that you are running. For example, if you’re selling perishable goods, power outages that knock out your refrigeration system could result in losses arising from food products that have gone bad and can no longer be sold.
Even if you are an online retailer that doesn’t have a physical location, there’s a good chance that you have at least a warehouse or storage facility for your products that should be protected via insurance as well.
If you run a small online retail shop from your home, purchasing some type of property insurance is still a good idea, since your homeowner’s policy usually won’t cover business-related losses in the event of property damage. Buying property insurance allows you to recover damages to your computer, printer, and any other business-related equipment found in your home office.
Employment Practices Lawsuits
If your retail business has more than 10 employees who interact with one another on a regular basis, then you should be protecting the company and management from possible employee claims.
Lawsuits being filed against employers related to issues such as sexual harassment, gender, pregnancy, religious discrimination, and ageism, wrongful termination, and failure to promote have been on the rise in recent years.
It’s not uncommon that the employee names the business’s directors and officers in such claims, holding them responsible for not doing enough to prevent harassment or discrimination at work. That’s why your business should consider putting together a management liability policy, which usually includes directors & officers and employment practices liability insurance (EPLI).
Third-Party and Employee Injuries
Retail stores can be very busy, crowded, and potentially hazardous workplaces, which is why it’s a good idea to purchase insurance that’s going to help cover the costs of someone getting injured at your facilities.
A general liability insurance policy would cover bodily injury and property damage suffered by third parties such as customers or business partners visiting your property.
When it comes to employee injuries, workers compensation is one of the rare types of insurance that is mandated in most U.S. states, meaning that you must purchase it by law. A workers compensation policy will cover costs related to employee injury claims, including medical bills, lost wages, rehabilitation costs, and even funeral costs and death benefits in worst-case scenarios.
The more employees you have, the more your workers comp insurance will cost.
As mentioned earlier, your property insurance will be able to cover the losses resulting from a fire or natural disaster causing serious damage to your business, providing you with the money you need to rebuild and reopen.
But what are you supposed to do while you wait to get your business back on its feet? There are bills and wages that still need to be paid.
In such a case, having a business interruption policy would be very important. If your business is forced to close for an extended period of time, a business interruption policy will help cover the many expenses that come with maintaining the business and keeping it afloat while you’re not making any money.
A typical business interruption policy will cover lost wages, rent, losses in revenue, loans, and will even cover relocation, overtime, and staffing costs if you have the opportunity to move your retail operation to a temporary location while your regular location is out of order.
When seeking out this coverage, what a lot of smaller retail stores (with less than 100 employees) do is purchase something called a Business Owners Policy (BOP).
Insurers have recognized that general liability, property, and business interruption insurance are staple policies that just about every business should purchase, which is why they created the BOP.
A BOP is basically a bundle that includes all three of those coverages, and best of all, it’s often significantly cheaper (and more convenient) to purchase a BOP instead of buying those three coverages separately.
Additional Retail Insurance Considerations
While just about any retail business would most likely benefit from having the aforementioned coverages in place, it’s important to remember that every business is different, which means that no two retail businesses have the same insurance needs, nor will two retail businesses pay the same exact amount for coverage.
Some other insurance policies that we haven’t mentioned as mandatory but still consider relevant and necessary for many retailers include commercial auto insurance and professional liability coverage.
If your retail business delivers products, or you have drivers that deliver products from warehouses to your stores, then you are going to need a commercial auto policy to protect your drivers in the case that they get into an accident. Inland marine and cargo insurance should be considered as well if you are transporting products regularly, especially if the products are expensive.
Professional liability insurance is often called errors & omissions coverage. It protects your business in the case that you are hit with a liability claim resulting from an honest error that one of your employees might have made. For example, if your employee gave advice to a customer about cleaning their record player that ended up ruining their equipment, that customer might sue your business for damages.
Professional liability insurance would cover defense costs and potential payouts in such a case.
How much any of the coverages we have mentioned will cost depends on a lot of different characteristics that define your retail business and the level of risk that your business poses to insurers.
The size of your business, your annual revenue, your specific industry, the type of products that you sell, your location, the number of employees you have, and your recent claims history are all things that are taken into consideration by insurers when calculating insurance premiums.
If you’d like to learn more about retail insurance and your business’s specific insurance needs, feel free to reach out to our brokers at any time for expert help and guidance from insurance professionals you have years of dedicated experience insuring retail businesses of all types and sizes.
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