How to choose the right type of ecommerce business insurance

Running a business comes with some risk, and while an ecommerce business may not be subject to the same ones that come with a physical storefront, it’s still necessary to be prepared with business insurance. The kind of insurance you need for your ecommerce business will vary depending on the industry you operate in and the liabilities it may be exposed to. Here, we’ll explore why ecommerce business insurance is necessary, including how business insurance can protect you and how to choose the right kind for your growing company.

Insurance exists to protect you and your business in the event of a worst-case scenario. While an ecommerce business will have different risks than a brick-and-mortar store or a company with offices, it isn’t free of risks entirely. Rather than protection against things like damage to your storefront or customer or employee injuries, ecommerce businesses need to be prepared for anything that can interrupt business operations. Here are a few risks that your ecommerce business can protect itself from with the right insurance:

• Shipping mishaps
• Damaged or stolen inventory
• Product recalls
• Data breaches or cyberattacks
• Supply chain issues that cause interruptions
• Lawsuits due to breach of contract with clients or vendors

As you can see, there are several ways ecommerce storefronts are exposed to liabilities, so business insurance is a must-have. The potential financial implications of not having insurance for your ecommerce business can far outweigh the cost of paying for insurance.

Legally speaking, business insurance requirements vary by state and business type. For example, almost every state in the U.S. requires that businesses hold a certain amount of insurance, and some have more specific requirements around the types of insurance that a business with employees needs to have. For example  there are five states — California, Hawaii, New Jersey, New York, and Rhode Island — that require companies to provide employees receive short-term disability coverage for their employees, regardless of the type of company.

Additionally, commercial insurance may be necessary at a certain stage of your business if you begin working with third parties. For example, a shipping fulfillment center or retailer like Amazon might require you to carry a certain amount of business insurance in order to work with them. Even if you’re operating your business out of your home, your personal or homeowner’s insurance policy won’t protect your business inventory, so it’s important to explore dedicated business insurance to keep your growing company protected.

You may understand that insurance is a necessity but still find yourself wondering what type of insurance makes the most sense for your specific business. Depending on your location and the specifics of your ecommerce business, the type of insurance may vary. Ultimately, ecommerce business insurance will help protect you from liabilities and interruptions in revenue — and these risks will depend on what you sell and how you sell it. You will also need general business insurance which may cover general liability, property damage, and bodily harm.

A few considerations when choosing ecommerce insurance may include:

• The industry you operate in
• The physical locations you conduct business in
• Any property or equipment you own
• Any intellectual property
• Employee protections
• Customer protections

Choose insurance that fits your industry and your specific needs. For example, an ecommerce business that also has a physical storefront might need insurance that can cover lost business in the event of a fire. Or the ecommerce business might need insurance coverage that can make up for lost business if a manufacturer supplies faulty products

Standard business insurance policies often cover your operations across the country. When purchasing insurance, it’s important to establish the locations where your business will operate. Insurance companies often charge different rates and premiums depending on your business’ location, and some may only offer coverage in certain states.

Many business insurance types overlap in their coverage, and it’s important to choose policies that are cost-effective, flexible, and cover your business operations adequately. Doing your research to ensure that your business is covered based on its industry, location, and shipping practices will help prevent out-of-pocket expenses should something happen. Below, we outline the most common types of insurance used by ecommerce businesses.

Business owner’s policy (BOP)

If your business employs fewer than 100 people, operates out of a small workspace, and makes less than $1M in annual revenue, you might be eligible for a business owner’s policy, or BOP. A BOP combines many different insurance coverages into a single policy, making it a flexible and affordable way to protect your business.

For example, if a flood damages your office, your BOP insurance might cover office repairs and pay employees’ wages while business is interrupted.

General liability insurance

For businesses that are too large to be eligible for a BOP, general liability insurance can cover liabilities, including claims of bodily injury, property damage, or personal and advertising injury such as slander or copyright infringement.

For example, if an employee slips and falls in your warehouse, general liability insurance can help pay for their hospital and treatment bills. If your coverage includes product liability insurance, your coverage can also cover any bodily injuries that your products may cause.

Product liability insurance

This business insurance can be helpful for ecommerce businesses to protect your online store from third-party claims of bodily harm or property damage caused by your products due to manufacturing defects, design flaws, or mishaps caused by inaccurate marketing or inadequate warnings. Product liability insurance can also cover medical bills and legal fees.

For example, if a customer were to use a product and injure themselves due an issue in how it was manufactured, product liability coverage can protect your business from legal liability and costs.

Business income coverage

Also known as business interruption insurance, this insurance covers your payroll if your business closes due to a covered incident.

For example, if a fire damages your warehouse and you need to temporarily stop operations, business income coverage can protect against certain financial losses that are sustained while the business is unable to operate (referred to as a period of restoration).

Insurance Services Office (ISO) worksheets from insurance companies can help create an accurate estimate for your business income coverage, with estimates accounting for worst-case scenarios. There are several worksheets available for free online.

Commercial property insurance

Commercial property insurance covers damage to your commercial business property or office space, if your ecommerce company has one. This coverage would apply to things including your office furniture, tools, and equipment.

For example, if a tornado cracks your office windows, commercial property insurance can help pay for the repairs.

Commercial auto insurance

If your employees are driving for work, such as to make deliveries on behalf of your ecommerce business, commercial auto insurance can cover the cost of car accidents.

For example, if your employee rear-ends another vehicle during a delivery, commercial auto insurance can help pay for any damages.

Workers’ compensation insurance

Workers’ compensation insurance provides your employees with benefits if they’re injured or fall sick while working. In the U.S., it's a legal requirement for all businesses to have workers’ compensation insurance. However, costs and rules on the types of employees that need coverage vary by state, so it’s important to look into your local regulations to make sure you’re complying with the appropriate requirements

For example, if an employee develops back problems from years of sitting for their office job, this coverage can help pay their medical bills.

Data breach insurance

Also known as cyber liability insurance, this can help if your business faces computer-related attacks, such as malware, phishing, and ransomware, or if a laptop with confidential information is stolen, data breach insurance will cover the costs.

How to get ecommerce business insurance

Before settling on a business insurance policy, it’s important to research your options, compare quotes, and speak with reputable agents. Independent agents can often source better deals because they sell insurance products from a range of providers. You may want to connect with fellow ecommerce business founders to find an agent that understands your needs who can match you with a provider you can trust.

In order to get business insurance quotes for your ecommerce business, you’ll need this information:

• Business name: Including your legal business or incorporation name and the trade name you operate under, if you have one.
• Your address: Where you operate and any physical locations of the business.
• Legal entity: The type of entity you operate as, such as a sole proprietorship or LLC.
• Property: Include unique features of your property, how much coverage you’ll want on the building and the items you own, and any property information that can’t be found online.
• Prior insurance: Include the name and relevant coverage information of any prior insurance companies you may have used, as well as related work experience you might have in the industry.
• Loss runs: Your current insurance company can give you a loss run, which helps a new insurance company choose what rates you’ll have. The lower your losses, the better your rates.
• Payroll numbers: Payroll numbers include prior losses, the industry your business is in, the number of people you employ, and the size of your payroll. These numbers can determine workers' compensation policies.
• Sales numbers: Sales figures can help determine your general liability rates.

Many insurance policies are tied to your business income, which you can find by calculating your gross receipts or sales. Your business income includes all items and services you sell at your business.

Follow these steps to calculate your ecommerce business income:

1. Add up your total revenue.
2. Subtract your business’ expenses and operating costs from your total revenue. This will lead to your business’ earnings before tax.
3. Deduct taxes from your business earning to find your business’ net income. Your net income will be your business income.

For some insurance plans, you will receive an audit at the end of each policy year before renewal, where you’ll owe or receive the difference between the amount you originally paid and the actual amount you owe. The actual amount is calculated based on your sales numbers, income, and losses.

As an owner or operator, understanding and managing the risks in running a business is vital to its success. An ecommerce business differs from a physical storefront or a business with offices and employees — but is still exposed to certain liabilities. By planning ahead and preparing for potential mishaps, you can focus on scaling and growing your business with peace of mind.