Insurance is a complex topic, especially when it comes to starting a business. The products are intricate, and it is easy to feel overwhelmed by the terminology.
On the other hand, insurance is an important way to protect your business, and if you ever have to rely on commercial insurance, it could mean the difference between an unfortunate situation and complete disaster.
What is E-commerce Business Insurance?
E-commerce business insurance is specialized coverage that protects online merchants from financial losses and liabilities associated with their digital operations. It covers risks such as cyberattacks, data breaches, product liability, and shipping incidents, ensuring the safety and stability of e-commerce businesses.
Why do online retailers need small business insurance?
If you sell products online, you need business insurance to protect yourself financially and legally. Business insurance reduces risks and protects your inventory and employees from worst-case scenarios, such as supply chain issues or on-site injuries.
Revenue is a good way to assess whether you’re ready to think about commercial insurance, but there are other factors to consider as well. Insurance, at its core, is a way to mitigate risks in your business.
Insurance, at its core, is a means to reduce risks in your business, and there are some risks that may not be covered by your current personal insurance policies, such as protecting your inventory.
If your inventory is at home or in your home office, your home insurance policy does not cover it. Additionally, business insurance is also a tax deduction for small businesses that you can take to reduce your tax liability.
Other reasons you may need business insurance include:
- Protecting your customers and employees if they are injured by a product
- Protection from cyberattacks and data breaches that expose sensitive customer data
- Protection from lawsuits due to contract violations with customers or suppliers
- Protection for your business against supply chain issues
- Protection for your business from damaged or stolen goods in your warehouse or in transit
At certain stages of your business, you will undoubtedly need commercial insurance as you will face contractual obligations to purchase it.
If you are working with a fulfillment center or selling to a large retailer like Amazon, they may specify that you need a certain amount of liability insurance, property insurance, or other types of commercial insurance.
Whether it is evident or not, if you decide that you need e-commerce business insurance, the next step is to find out where and how to purchase it. Types of E-commerce Business Insurance
Once you find a broker to work with, they will sit down with you to review your business and identify potential risks it may face, helping you find the right amount of insurance to mitigate those risks.
However, being an informed consumer of financial products is important, especially when it comes to your business.
For e-commerce businesses, especially those that are just starting out, here are seven main types of insurance you will need to consider – although there are other types you will need as well – and your broker will be able to help you determine which ones are right for you.
1. General Liability Insurance
General liability insurance typically covers the damages that someone incurs while on your property or while using your product, regardless of where they are. It is the first line of defense against harmful business risks.
General liability insurance covers three main areas: any claims of bodily injury made by customers or individuals interacting with your business, such as delivery personnel. Any claims of property damage resulting from interactions with your business. Any claims of slander, libel, or copyright infringement directed against your business.
It can
The coverage will protect you if a third party is injured either by interacting with people in your company or with your product. For example:
- A small child chokes on a part of a toy you sell
- A allergic reaction to a material used in your clothing
- An injury caused by a bad interaction between some makeup ingredients and someone’s skin
Liability does not only pertain to product categories. Even if you believe there is no basis for a claim that someone was harmed by your product, that is not a good reason to ignore liability insurance.
And remember, even if there is not a strong legal basis for a claim that someone was harmed by your product, you will still have to pay legal fees to the claimant to get rid of the lawsuit.
Price: varies based on risk profile and sales. Insureon estimates this to be around $42 per month. For example, NEXT Insurance clients typically pay between $25 and $75 per month, with the average for e-commerce businesses being about $31 per month.
Liability insurance is usually priced based on your sales volume and the products you sell. Products with higher risks, such as fireworks, may come with a higher liability insurance cost, as well as higher sales volume.
2. Product Liability Insurance
Product liability insurance will cover any compensation you must pay if someone is injured due to a defective product designed or manufactured by your business. It is similar to general liability but is more focused on defects in design and manufacturing.
If you sell any products to customers, you risk causing injury or damage to someone else’s property. For example, if food processed in your commercial kitchen makes a customer sick, they may sue your business.
Product liability insurance covers: medical treatment bills for the customer to treat the injury. Legal fees and trial costs related to the case. Settlements paid.
Without product liability insurance, you would need to pay these costs out of pocket. This type of insurance also covers claims related to: design defects, such as a lack of safety features or accidentally designing a dangerous product. Hidden defects, such as toxic materials or food. Failure to warn, which is the failure to provide adequate instructions or warnings for using the product.
Insurance companies offer this type as a standalone policy and as an add-on to your general liability insurance.
Price: between $300 and $600 annually.
3. Business Property Insurance
If you sell physical products, you should also insure those physical products in case something goes wrong. Business property insurance covers theft, loss, or partial or total damage to commercial inventory and business property.
For example, if your home burns down and all your inventory is in it, that’s a devastating loss. That’s where property insurance comes in. In this case, property insurance will also cover any equipment that was damaged, and it will cover the cost of replacing those items in full.
It’s important to note that your existing homeowners insurance policy will cover your personal items, but it is unlikely to cover anything related to your business. If you run your business from home, it’s important to have both aspects covered, unless you can replace all inventory and equipment out of pocket.
The other important thing to remember is that your property insurance will cover the cost of replacing your items, not the retail value. In other words, insurance will cover what you paid to acquire those items. You just need to show proof of the replacement cost. For example, let’s say someone breaks into your office or home and steals your laptop. If you have a 2020 MacBook, you won’t be able to buy a 2022 MacBook Pro. The insurance will cover the replacement cost of what you had.
Price:
63 dollars per month, on average.
When purchasing property insurance, your broker will work with you to calculate the total value of the property you are insuring. This figure is the primary variable that will affect your insurance levels, so you will pay less to insure a stock and equipment value of $5,000 than you will pay to insure a stock and equipment value of $50,000.
4. Workers’ Compensation Insurance
Workers’ compensation insurance provides wages and medical benefits to people who are injured on the job. It also pays compensation to the family of someone who dies at work. Workers’ compensation insurance is not available for people who are injured outside of work.
Most states require workers’ compensation insurance for businesses. If you do not have the required insurance in the state required, you may face hefty fines. The state government also determines the amount of coverage, wages, and medical benefits that a worker receives.
One provider alone had over $43 billion in net written premiums for the year 2021 alone.
Workers’ compensation insurance often covers: medical expenses, lost wages, ongoing care, funeral costs, repeated injuries, and disability.
For example, if a warehouse employee strains his back while lifting a heavy box, workers’ compensation insurance will cover the related treatment costs.
Price: $45 per month, on average.
5. Cargo Insurance (or Inland Marine Insurance)
Cargo insurance, or inland marine insurance, is a type of insurance you may only need in a somewhat specific commercial context. However, it is a type of insurance that can become highly relevant to e-commerce businesses and companies selling physical products as they grow.
Inland marine insurance protects your inventory when it is shipped in bulk and is of high value. It helps replace covered property if it is damaged due to theft, fire, water, wind, or cold. Some policies also cover loss due to accidents or mishandling.
Inland marine insurance covers goods and property in transit, such as: goods and property in transit, electronics, computer, video, audio, and radio equipment, fine arts and antiques, medical diagnostic equipment, trade show exhibits.
Let’s say you have a large shipment of inventory and you send it to a fulfillment warehouse to streamline your shipping process. You send it and you’re happy that you’ve completed this task, but the next day you receive news that there’s been an accident on the road, and 75% of the inventory you shipped has been sufficiently damaged. When working with suppliers, warehouses, or distributors, even though it seems intuitive, you should read and understand your contracts to know when you are covered by their insurance and when you are not.
“Generally, storage companies will require their clients to have their own insurance coverage,” according to Carl. “It’s very rare that I see a warehouse say ‘yes, we will cover your property fully, there’s no need to purchase your own insurance’.”
An insurance broker can help you find coverage to manage this risk if you need it. They will also be able to work with you to identify other coverage you need as an e-commerce business.
Price: $147 per month, on average.
6. Cybersecurity Insurance
Digital security is a challenge faced by every e-commerce store. Hackers can steal customer information or credit card information, or install malware on someone’s computer. As an online business, you are responsible for protecting sensitive customer data. In fact, small businesses find themselves more vulnerable to these threats than large companies, according to research.
This is where cybersecurity liability insurance comes into play. This type of insurance covers any legal claims, legal penalties, customer settlements, and fines related to data breaches or cyber attacks. It also covers the costs of investigating the issue and recovering lost data and funds related to the attack.
Costs vary.
Cybersecurity insurance depends on the policy you choose, but it usually covers: loss of revenue due to a breach; loss of financial transfers; cyber extortion; data loss and recovery costs; public relations management after the breach; investigation and informing clients about the breach; forensic consulting costs to prevent future breaches.
Price: $140 per month on average. It varies based on the risk profile and coverage.
7. Business Interruption Insurance
Business interruption insurance replaces lost income if your business stops operating due to direct loss or damage. This type of insurance compensates policyholders for any costs related to natural disasters or fires, and it also covers the rebuilding of lost facilities. It is often sold as an add-on to an existing policy.
Coverage for business interruption includes, but is not limited to: lost profits; fixed costs; training costs; employee wages; taxes; loan premiums.
Price: between $40 and $130 per month, but it costs more for high-value and high-risk businesses.
8. Professional Liability Insurance
Professional liability insurance, or errors and omissions insurance, protects your business from claims related to work performance, negligence, or misconduct. This type of insurance especially applies to individuals selling professional services online.
If you make a mistake, or someone believes you made a mistake, and your client suffers a loss as a result, they may sue you for it. A professional liability insurance policy will protect you from those costs. For example, a real estate agent could be liable for damages if they failed to notice mold.
Each state’s requirements regarding which businesses need professional liability insurance vary—some states require real estate agents to obtain errors and omissions insurance, while others do not, for example—so check with an agent in your area.
Price: from about $56 to $117 per month. Insureon found that the figure averages around $61 per month.
Learn more: Business Tenant Insurance: A Guide for Business Owners
Cost of Insurance for Online Businesses
The cost of business insurance ranges from $600 to $1,200 per month. NerdWallet compiled prices from three major commercial insurance providers and detailed them as follows:
It is difficult to pinpoint a specific number, however, since your commercial insurance costs depend on various factors, such as: potential risks; location of the business; claims history; what you sell; number of employees; annual business revenue; business assets.
Your total cost also depends on the number of policies you need. For example, if you run a new e-commerce business, you may not invest in business interruption insurance until you have more cash flow. Meanwhile, medium to large-sized businesses with full operational warehouses and multiple employees will certainly want to cover their facilities.
The higher the risks you face, the more insurance coverage you will need, leading to increased costs. If you operate a small e-commerce company producing and selling products from home, your insurance costs will be much lower than a large e-commerce company with employees and warehouses.
Learn more: Entrepreneur’s Guide to Small Business Financing
To understand the cost of insurance for e-commerce businesses, contact potential insurance providers for a customized quote for your business. If you’re looking for basic insurance coverage or have an insurance provider in mind, it’s a good idea to contact them directly to find out what they offer, get a quote, and determine if it suits your business. But there are also other options to get the best deal.
Working with a Broker
You may
The intermediary may not be suitable for your business. In this case, using an online insurance marketplace for businesses may help. It’s a more interactive approach, but it could be faster if you need coverage quickly.
Online insurance exchanges partner with leading companies and offer quotes from multiple providers so you don’t have to contact them individually. The marketplace requires just information about your business and the insurance you need, and quotes will be generated from their partners.
Some of the best online insurance marketplaces for businesses include CoverWallet and Simply Business.
Compare Policies
Always compare the offers and choose the policy and provider that works best for your business. Review each offer carefully, ask questions, and perhaps even consult with your advisors.
Consider the following factors when comparing offers: policy coverage. Liability limits. Premiums and deductibles. Payment terms. Provider ratings and reviews. Customer service.
Finding an insurance policy for your business that meets your needs from a reliable provider, with the coverage you need, at a reasonable price should be your goal. Purchase and review annually.
The final step is to purchase your policy or policies. Once you do that, learn when payments are due, how to file a claim with your provider, and how to contact customer service if needed. Most insurance companies allow you to pay, file claims, and contact support online, as well as add additional insureds or request a certificate of insurance.
Make sure to review your policies and determine if they need to be adjusted or changed periodically. Finding the best insurance for your business online.
There will always be some risks associated with running a business, but identifying those risks and mitigating them is something you do daily as an entrepreneur. Working with an informed broker can help you identify and manage risks you may not have planned for in the first place and alleviate that burden from your shoulders.
In the end, there’s a significant difference between putting everything you have into a business and finding out it won’t succeed, and closing your doors due to an easily avoidable issue with damaged inventory.
This post is for informational purposes only and does not constitute legal or financial advice.
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FAQs about E-commerce Business Insurance
Do I need insurance for a drop shipping e-commerce business?
Yes, you should have insurance if you run a drop shipping e-commerce business. You are still responsible for any injuries related to the products that customers may encounter. Additionally, if products are damaged or stolen in transit, you won’t want to bear the cost alone. Insurance helps mitigate the risks.
What insurance do I need to sell products?
Businesses that sell products online often obtain product liability insurance. This insurance covers your business from any complaints or claims regarding the products you manufacture, distribute, or sell. If a product does not work properly or injures someone, product liability insurance can help reduce financial and legal damage.
What is the best insurance for an e-commerce business?
Product liability insurance is undoubtedly the best insurance for e-commerce businesses. Products are the core of your business. No matter what products you sell, something can go wrong with them, making product liability insurance a smart step for e-commerce businesses.
Source: https://www.shopify.com/blog/commercial-insurance-for-ecommerce
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