Overview of the E-Commerce industry

The online retail industry has seen astronomical growth in the past decade, and with that raises unique challenges and risks. According to a study by BigCommerce and Square:

  • 96% of Americans with internet access have made an online purchase in their life.
  • 51% of Americans prefer to shop online in 2018.
  • E-commerce is growing 23% year-over-yearyet 46% of American small businesses do not have a website.

That’s a clear upward trajectory. And the barrier to entry for those businesses who don’t have a website has never been more permeable. User-friendly web design platforms have made it possible to launch an online store in a matter of hours.

Or, if companies don’t want to go through the process of building an online presence, retailers like Amazon and Alibaba provide the marketplace for them (at a cost, of course). These e-commerce behemoths have been dominating the marketplace and there’s no sign of that stopping. Amazon might even claim the majority of all online sales as soon as 2021.

Biggest players in e-commerce as of 2017

  • Amazon – almost $178 billion in revenue, up 31% from 2016.
  • Alibaba – ¥158 billion ($25 billion) in revenue
  • eBay – $9.6 billion in revenue
  • Shopify – $673 million in revenue, up 73% from 2016.

It should come as no surprise, then, that e-commerce is expected to make up 17% of all retail sales in the US by 2022.

Some of the biggest risks E-Commerce companies face

By nature, running an E-commerce business exposes companies to a different risk profile versus traditional brick and mortar stores. Here are some common threats that the E-commerce industry is subject to:

Data Breach

When sensitive information is data is copied, transmitted, viewed, stolen or used by an individual unauthorized to do so. The Equifax Breach in 2017 that leaked 145.5m customers accounts (including social security numbers) was due to a server security patch that was not implemented.

DDoS Attack

Distributed denial of service (DDoS) attacks are when hackers use botnets to flood a website with so many requests it crashes or become inaccessible due to overload. These attacks have a direct impact on revenue and the trust you’ve built with your customers.

Fraud

E-commerce transactions more likely to result in fraud than face-to-face ones. Stolen credit card use, unauthorized card users and hacked store credit can impact e-commerce retailers bottom line. In Q2 2017 “account takeover” fraud alone rose by 45%  – costing online retailers $3.3 billion.

Product Defects

Product defects can have a significant impact on the bottom line, especially if you offer free returns. Moreover, major defects can have a huge cost. In 2016 IKEA recalled 29m of its chests and dressers due to a tipping hazard, which tragically caused the death of 3 children.

Why is Insurance for E-commerce Organizations Important?

Think about the risks involved with e-commerce compared to traditional retail. Of course there are claims online retailers have to deal with that would rarely be faced by your average walk-in store, but some things never change.

Both e-commerce and brick-and-mortar retailers have to bear the risk of being a link in the supply chain of a product that could hurt somebody. Both have employees who need to be protected from injury and management who needs to be protected from shareholder lawsuits. But bodily injury claims like slip-and-falls are less likely in e-commerce. Alternatively, the chance of someone stealing customers’ sensitive information is a great deal higher for online stores.

The importance of computers and system integrity for e-commerce companies cannot be overstated, so let’s start with some of the risks insurance addresses. The theft of customers’ personal info — or worse yet, their financial info — is a looming threat for online retailers. Bad actors can wreak havoc by stealing data, encrypting your data and extorting you, or shutting you down with a DDoS attack. These challenges can cause lasting damage to a company who isn’t prepared to face them.

Cyber Security

One study showed that the retail industry is most at risk of attack by hackers. And the majority of the attacks against retailers specifically targeted the servers and databases of e-commerce sites. Small online companies present some of the best targets since big-box retailers started investing heavily in cyber security. For hackers, these small businesses who think “OK, but it probably won’t happen to me” are the lowest-hanging fruit since they can attack a large number of victims with much less effort than an attack on Amazon would ever require.

Product Risks

Food can make people sick, small objects can be swallowed by children, safety equipment can fail, machinery can malfunction and hurt the user…amazingly, baby powder can cause cancer. The list goes on and on. Bottom line, product liability exists regardless of where you are in the supply chain or whether you company has a storefront or not.

Standard Business Risks

There are the risks every company has to deal with. Most states require employers to purchase workers compensation insurance for their employees. And speaking of employees, the company can be sued by its workers for employment practices violations. Stakeholders in the company can file suits against management if they feel they haven’t upheld their fiduciary duty. Competitors can take you to court with allegations of unfair trade practices, intellectual property infringement or defamation.

What Insurance do E-Commerce companies need?

What insurance to e-commerce companies need

Protect Yourself and Your Organization

Product Liability Insurance

What it covers:
Covers the company if a product they manufacture, distribute or sell causes bodily injury or property damage. Any company in the supply chain can be held liable if there is an injury that wouldn’t have occurred if the product wasn’t brought to market.

Why you need it?:
Product liability claims are costly from both a legal and reputational perspective. It protects e-commerce companies in two ways. 1. Covers companies that manufacture or important products against lawsuits if a product fails and causes injury or illness to a consumer. 2. Provides protection in cases where the retailer damages or mishandles the product being sold in a way that harms the consumer.

Directors & Officers Insurance

What it covers:
Protects the company and key individuals from liability related to the management of the organization. Companies that indemnify their executives against certain covered claims can turn to their D&O policy for reimbursement. If the organization itself is named in a suit, the policy would defend the entity in addition to its leadership.

Why you need it?:
Ensures the company and its leadership is protected from legal liability related to allegations of breach of fiduciary duty and other management-related claims. It provides the capital required to absorb certain legal costs without mortgaging the future of the entire organization.

Cyber Insurance

What it covers:
This protects your organization from lawsuits, fines and penalties arising out of a hacking attack or data breach. It can also reimburse the company for its direct expenses such as breach notification costs, credit monitoring, data restoration and forensic analysis.

Why you need it?:
If you collect any sort of personal or organizational information, have a “login” feature on your site, integrate with another organization’s systems in any way, have employees who could fall for a phishing scam, generate online content such as blog posts or even simply rely heavily on email communications, you need cyber liability insurance. E-commerce companies who regularly process transactions (or host a third party payment processor) are highly visible targets for hackers and, as such, should be protected.

Ocean Cargo and Inland Marine

What it covers:
These are two different policies that cover the same risk: products or inventory being damaged, destroyed or lost while in transit. An ocean cargo policy would protect you from the risk of the loss of a plane or ship that is carrying your inventory. And “inland marine” shifts the covered territory of a cargo policy “inland”: instead of insuring risks at sea or in the air, coverage applies overland, shoreline and river transport shipments.

Why you need it?:
Taken together, these policies provide a comprehensive plan for managing the risk to your property while it’s out of your control. Shippers often offer their own insurance, but those policies are designed to protect the shipper, not their customers. E-commerce retailers that frequently ship products or inventory will want to have their own policy that will reimburse them right away.

Workers Compensation & Employers Liability

What it covers:
Provides a legally required coverage protecting employees if they are physically injured or get sick while on the job. Legal requirements vary state-by-state so be sure to research the laws in each state where you have employees located.

Why you need it?:
Fines could be imposed on any company that doesn’t comply with their state’s workers comp laws. Employers liability coverage also provides valuable legal defense costs if a lawsuit develops in connection with the injury or illness outside of what standard Workers Compensation covers.

Property Insurance

What it covers:
Building coverage protects properties that are owned, while business personal property coverage reimburses for covered damage to the contents of a building. Lost income and extra expenses caused by a covered loss can also be addressed by business interruption coverage.

Why you need it?:
Any company with a physical presence runs the risk of their physical property being damaged or destroyed. If you hold large amounts of inventory or own equipment you’ll often have a lot at stake. On top of that, renting temporary office space after a fire is a surprise cost that no business needs to be caught off guard by.

Employment Practices Liability Insurance

What it covers:
Protects the organization and its management by paying the costs of defending against certain suits from employees or investigations from government agencies. Common claims include allegations of harassment, discrimination, retaliation, and wrongful termination.

Why you need it?:
If you or the organization itself is named in such a claim, the coverage would defend you and pay the judgment or settlement against you. Keep in mind how easy it is for an employee to start an action that requires a legal defense.

General Liability Insurance

What it covers:
Covers the organization from some of the fundamental risks that come with running an Ecommerce organization, such as ‘slip and fall’ claims, damage to a third party’s property, products liability claims, damage to rented space, and personal or advertising injury claims.

Why you need it?:
It forms the foundation of any risk management program. On top of protecting the company from legal liability caused by bodily injury or property damage, this coverage is usually required in contracts like office leases and vendor agreements.

Crime Insurance

What it covers:
Protects the company from loss caused by certain illegal activities. Unlike many other commercial insurance policies, it has nothing to do with defending against lawsuits from third parties. This policy instead reimburses the company itself for losses of money, securities or other tangible property that it directly experiences.

Why you need it?:
Most businesses are exposed to the risk of criminal activity. This insurance protects your company from crimes committed within the company itself as well crimes committed by people or other factors outside of your company. Common claims include:

  • Employees stealing money from the company or clients.
  • Inadvertently accepting stolen credit cards, counterfeit credit card numbers or payments from unauthorized users
  • Non-employees stealing from the company’s office or from the premises of the company’s bank.
  • Robbery of valuables while in transit under the care of a messenger or armored car.
  • Computer and wire transfer fraud.

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