This article describes five types of insurance for online retailers and e-commerce stores, including general liability, cyber liability, inland marine, workers compensation and employment practices liability insurance.
Before I became an insurance broker I ran an online small business with several e-commerce stores built on Drupal and WordPress.
I was essentially a “solopreneur”…
And I couldn’t afford to have one day go by without revenue coming in.
I’m not a software developer, though, so I worried about what I would do if my online retail business was attacked with malware or held ransom with extortionware.
As such, I decided to buy a business owner’s policy (BOP) with cyber liability insurance because the idea of paying $150,000 in Bitcoin ransom to cyber criminals to “unlock” my business data would have been catastrophic to me.1
Maybe you can afford to have your business be offline for days or weeks…
I couldn’t.
As such, if you’re like me, if you sell physical products, online digital products (i.e. “information products”) or services2, you should take steps to protect yourself and your online business from online business risks.
Below I outline five types of insurance for online retailers that you can buy to protect your online or offline business, if you rely on e-commerce website for your revenue.
1. General Liability Insurance
General liability insurance, also called “commercial general liability insurance“, or CGL, is considered the cornerstone of business insurance.
If you lease space in an office, or provide indemnification via contracts with 3rd parties such as clients or business partners, or work with clients on their premises you should have general liability insurance.
Commercial leases almost always require you to carry CGL insurance with additional insured status and a waiver of subrogation and/or other endorsements.
Your CGL exposures arise out of your business agreements, premises operations, personal and advertising injury and products3 and completed operations exposures away from your place of business.
The CGL protects your business from third (3rd) party claims against your business related to bodily injury (BI) and property damage (PD).
General Liability Claim Examples:
A common example of how general liability is a useful type of insurance for online retailers is related to product liability claims.
Imagine you own an e-commerce website reselling “hoverboards” imported from China. A U.S. customer orders a hoverboard from you and you sell it to the customer and deliver it. Then, while the customer is charging it, it catches on fire, lights the curtains on fire and burns his house down.
Even though the product came from China, and you were just the reseller, the U.S. customer is not going to sue someone in China… They’re going to do the easiest thing and sue your company for their property damage and any personal injury related to the incident.4
Another example of a general liability claim is a “slip and fall”. If you have customers or visitors who set foot in your place of business, you have exposure.
Let’s say you own a business called “ABC Coffee” with a website at abccoffee.com that sells coffee and coffee supplies and a physical retail cafe location. One day it is very cold with snow and freezing rain outside and your manager forgets to clean the floor by the entrance. A customer walks in to order a hand-crafted latte and slips and falls on the wet floor and breaks their wrist. They may file a lawsuit against you for the wet floor that resulted in them slipping and getting injured.
General liability insurance can be very affordable for online retailers.
General liability limits usually start at $1,000,000 per occurrence and $2,000,000 aggregate, per year and goes up from there. This means that your insurance can cover two occurrences that result in claims of $1,000,000 each in the course of a year.
General liability is usually paired with an umbrella policy that provides an additional layer of coverage above the primary CGL limits.
Umbrella coverage is usually much less expensive than general liability because any claims hit the general liability policy first, before the umbrella limits kick in.
2. Cyber Liability Insurance
As I mentioned above, I often worried about my own small online business falling prey to a cyber attack.
The reality today is that clicking on one bad email can lead to ransomware, dangerous malware or a virus that puts your company data at risk or shuts down your online e-commerce sales.
SPAM emails and phishing are the #1 culprit in cyber attacks, such as cyber-extortion.
However, the dangers of a virus or cyber-extortion go beyond lost revenue.
If you are hacked you also risk:
- Losing control of your business data
- Being sued or fined for non-compliance with data security laws
- Losing search engine rankings in Google5
- Suffering reputational harm with customers and partners
Surprisingly, most ransomware attacks target small business. In the aftermath of COVID-19 cyber insurance is even more important because employees are working remotely and using their own technology where they are not protected by corporate firewalls and hardened security systems.
As such, perhaps the most appropriate type of insurance for online retailers is cyber liability insurance.
Cyber liability insurance can provide you with protection for your own business assets (1st party coverage) and protection for the people you do business with (3rd party coverage) against cyber risks, also known as “perils”.
The perils covered by cyber liability relate to the use of the Internet and risks that can occur through desktop, mobile and tablet devices including malware, phishing, ransomware, DDoS, hacking and other types of cyber crime.
Cyber liability insurance cost is driven by factors such as your sales volume, your industry, the type of data you collect and store, your security protocols, etc.
Cyber liability covers perils that may be excluded from other types of insurance coverage (general liability, professional liability, workers compensation, etc.).
Examples of first (1st) party cyber liability coverages:
- Paying ransom (if hit by ransomware aka “cyber extortion”)
- Business interruption
- Funds transfer fraud (social engineering)
- Malware
- Phishing attack (could be attempt at social engineering)
- Cryptojacking
- Bricking
- Computer replacement
- Data restoration
- Reputational harm/loss
- Crisis management and PR
Examples of third (3rd) party cyber liability coverages:
- Data breach
- Network and information security liability
- Multi-media content liability
- PCI fines and assessments
- Regulatory defense and penalties
- Bodily injury and property damage
If you regularly process credit cards or keep personally identifiable information (PII) records of your customers, you may be exposed to legal liability. In the wake of massive data breaches from Yahoo, Facebook and other online businesses, states such as New York and California have implemented new consumer cyber laws to protect their residents against cyber fraud and breaches of their personal data. Having cyber liability insurance can help you comply with new cybersecurity and data breach laws.
Financial services, healthcare companies, architects, designers, engineers, builders, etc. sometimes overlook the importance of cyber liability to their businesses.
I often ask creative entrepreneurs who own businesses designing green buildings or creating complex building engineering documents, “How much are all your digital designs and proprietary drawings and plans of clients worth? What would happen if all those digital records were suddenly unavailable, or corrupted or locked up and held for ransom?”
3. Inland Marine Insurance
Another type of insurance for online retailers is “inland marine” insurance. Inland marine is an odd-sounding name for a type of property coverage that protects your business inventory and business property while it is in transit from one place to another, or away from your primary place of business.
In the early days of international shipping, “marine insurance” was used to protect against the risk of valuable cargo being lost while it was at sea. The term “inland marine” was coined for the type of insurance that protected the cargo after it was unloaded from the ship on land for the remainder of its voyage, prior to reaching its final destination.
Imagine if an entire shipment of your products that were custom made in China were totaled in a trucking accident while they were being transported to you or your warehouse… Who would pay for this lost inventory? Would you have coverage for this?
If you import products from China, or another country, or even if you use a dropshipper, you may want inland marine insurance to protect your inventory while it is being delivered to your warehouse or distribution center.
For inventory stored in a warehouse, such as a dropshipper, or third party logistics company, be sure to have the warehouse location listed on your insurance policy to pick up that potential exposure.
4. Workers’ Compensation Insurance
Workers’ compensation insurance protects your business from claims of employee work-related injuries.
Workers’ compensation is required for employers in every state except Oklahoma and Texas.6
Independent contractors are not eligible for workers’ compensation insurance, however it is still possible to be sued by an independent contractor (see “employment practices liability” below) or for an independent contractor to be injured on the job.
If you are misclassifying employees as independent contractors, this practice can lead to complications, fines or lawsuits if someone is injured and they do not have insurance.
One benefit of workers’ compensation is that it uses a “no fault” concept, meaning that if an employee is injured on the job, instead of suing you, their employer, they will file a workers’ compensation claim.7
When an employee is injured, the concept of “no fault” in workers’ compensation means that employees give up the right to sue their employers and employers give up the right to pursue common law defenses.
Limits of coverage for workers’ compensation vary from state to state. California has a $1MM limit across the board, whereas Massachusetts and New York are technically unlimited.
5. Employment Practices Liability
Employment practices liability insurance (EPLI) protects your business from claims of wrongful acts arising from the employment process.
Types of claims covered by EPLI include discrimination, sexual harassment (#metoo), wrongful termination, failure to promote, work retaliation, failure to hire and other workplace employment issues such as defamation, invasion of privacy, negligent evaluation and deprivation of career opportunity.
An examples an EPLI claim would be an employee alleging inappropriate sexual advances by a superior who caused the employee to feel unsafe at work.
EPLI protects directors, officers, managers, employees and may even include even independent contractors as insureds under the policy.8 Whereas general liability insurance covers bodily injury and property damage, EPLI commonly excludes these claims.
Employment practices liability can be purchased separately or along with a management liability policy including directors and officers liability and/or fiduciary liability. If your online business also has significant contact with the public, you should also consider 3rd party EPLI to close a potential gap in your general liability insurance.
Summary
These are just some of the types of insurance for online retailers that you should consider to protect your online business.
The larger or more unique your company is the more likely your needs will be met by a customized insurance plan provided by an insurance broker who understands your business and can advise you on policy language.
You should also understand the risks of buying an insurance policy from an online insurance retailer or agent who doesn’t represent you – and may be representing the insurance company (i.e. a captive “agent”).
Have questions about any of these types of insurance? Schedule an appointment with me or give me a call at 203-200-0445.
Footnotes
- Stories like this one about a small business hit by ransomware reinforce the importance of having cyber insurance. Their $150,000 ransomware demand all started because one employee clicked a bad email.
- Such as online downloadable e-books, SaaS services, exam preparation, online quizzes or online training courses
- Products liability insurance provides coverage for damages you become legally obligated to pay (including liability for claimants' costs and expenses) as a result of a claim against you that arises out of bodily injury or property damage that is caused by an insured product. Product liability can also cover you for all costs and expenses associated with a product recall. A product recall could arise as a result of an error in the production process.
- It is more likely that the customer would sue you than trying to sue the manufacturer in China. At the very least your company would probably be named as a defendant in the lawsuit with the Chinese manufacturer.
- If your business relies on organic Google rankings from search engine optimization (SEO), you may find your rankings have tanked - often never to recover - due to virus or malware or getting caught up in an algorithm update that flags poor security on your part.
- Oklahoma and Texas are the only states that are considered “elective” states where businesses are not required by law to have workers' compensation in place.
- Note that employees who believe a third party (not their employer) was responsible or somehow negligent contributed to their injury may sue that third party in addition to receiving workers' compensation. Are you a contractor located in New York? Learn more about the ins and outs of workers' compensation coverage, third party liability and exclusions by learning about action over exclusions.
- Check the policy for the definition of "employee" which may include seasonal, part-time workers, leased employees, interns, volunteers, temporary or seasonal workers and independent contractors (subject to qualifying criteria). Also, as prospective employees may also file a lawsuit for "failure to hire", discrimination and equal employment opportunity commission (EEOC) actions.
