When an ecommerce business begins to grow, new risks mount and site owners should examine insurance options. Finding an insurance agent who understands the challenges of online business has been tough for many e-business owners. Only recently have insurance options become available.
Online businesses differ from their brick-and-mortar counterparts in ways that present unique challenges for insurance companies.
"An ecommerce business owner has the challenge of facing all the traditional risks that any business faces, plus those unique to ecommerce," said Nancy Callahan, a vice president with AIG Insurance, which offers ecommerce coverage.
Callahan says the traditional risks include protection for your property, your employees and those who do business with you. Generally speaking, those risks fall into property and casualty insurance — the property coverage protects the physical assets and the casualty coverage protects the company if someone gets hurt or suffers financial loss in the course of doing business with you.
"What is challenging both for businesses and insurers is how to take those overall concepts of 'harm to assets' and 'harm to others' into the virtual world," she said.
A typical small ecommerce business might operate in the following manner: The business owner runs the site from his/her desktop in Paducah, Ky., the "store" is on a server in Chicago and a third-party fulfillment company houses the products in Phoenix.
"The [online] exposures are different than traditional brick-and-mortar businesses," said Mark Hutchins, a vice president with Euclid Managers, LLC, a Kansas City-based specialty insurer that offers plans for ecommerce businesses. "Some of the exposures are certainly the same, but there is a newly-evolved focus of risk that is primarily attributable to the medium in which ecommerce operates."
Hutchins says insurance options have evolved to help ecommerce owners assess and manage those new risks.
Seven important issues emerge in regard to ecommerce business insurance:
High-risk areas particular to ecommerce
While both online and offline merchants must deal with risk, some directly linked to online endeavors include:
Data security, in which the most commonly publicized areas of exposure involve unauthorized access to customer data and/or the dissemination of customer data by accident or through fraud. For online merchants, "it becomes an added obligation to protect that data. There are potential liabilities if that information is compromised or exposed," Callahan said.
Business interruption caused by third-party providers. At times, business may be interrupted when customers are unable to access the website because of disruption or denial of service. Server problems during the Christmas-buying season can have a devastating impact. Business interruption can also occur because of disasters such as a fire at secondary support locations — your main supplier or your warehouse.
What insurance agents want to see
As a general rule, the more information your insurance agent has available, the better understanding of your business he/she will attain. According to Hutchins, you should be prepared to provide your agent information about your background, experience and qualifications for the business you are running; the company's financial history and current status; a list of current assets and even a profit-and-loss statement.
"If it is a start-up business or less than three years old, I would bring in a business plan — the more detailed the better — so the insurance agent can generate a solid understanding of what you are doing today, how you do it and how you hope to evolve that in the next few years," he said. He advised including information on third-party vendors such as the server host, payment processor, fulfillment house — any company with whom you have signed a contract in order to operate and maintain your business. The details of those arrangements will be critical in making sure you get the best advice and the best coverage.
Recommended levels of liability coverage and deductibles
Ultimately, the amount of insurance purchased is relative to the amount of risk the business carries and how much exposure the owner is willing to tolerate. Since each business is different, it's impossible to have a hard-and-fast formula for coverage levels. However, Hutchins offers the following general guideline: "If you are a relatively small business with less than $5 million in equity, then, generally speaking, look to buy either $1 million or $2 million in liability limits."
In terms of actual losses paid, Hutchins said, "it has been our history, along with what we can evaluate from our peers, that there are very, very few cases of large dollar losses — even including legal expenses — that exceed $1 million or $2 million." Most liability coverage is offered on an annual aggregate basis.
Regarding recommended deductible amounts, Callahan said the answer rests on the question of how much loss a business can absorb. "If a company is able to withstand a $10,000 loss, then it sets the deductible above $10,000," she said. "If it can withstand $100,000 loss or $1 million loss, then it would adjust the deductible to reflect that, and the premium would go up or down commensurate with that."
Making sure your agent understands ecommerce
Start with basic questions that would be relevant in any insurance context: How long has he/she been in business? Does he/she have a good reputation in the community? Beyond that, Hutchins and Callahan suggested asking a potential agent:
What experience do you have evaluating risk and placing insurance for e-businesses?
What products can you offer that are designed specifically for online merchants?
What can you tell me about the risks that are unique to ecommerce?
If you don't get answers that demonstrate an understanding of ecommerce, it's probably time to look for a different broker. It's possible you'll have more success if you talk with an independent insurance agent who can discuss a multitude of specialty options and is not limited to a single company's line of products.
"It is not necessarily a problem if brokers lack extensive ecommerce insurance experience, as long as they are willing to work with a knowledgeable wholesaler," Callahan said. However, "I would be concerned if this is the first time they have handled this kind of insurance and they are trying to learn it on the fly. It can just take time."
Hacking: Who pays if it happens?
If data is compromised, there's no definitive answer as to who is responsible, said Callahan, as it depends upon the contracts in place between the ecommerce company and its partners: Server host, shopping cart provider, payment processor and other companies involved with the business. "A lot of it comes down to the contracts. Lawyers spend a lot of time trying to allocate responsibility in those commercial agreements," she said. "I think you have to start with the premise that the business will be held responsible unless that responsibility has been transferred to somebody else through contract and service agreements."
Prioritizing types of insurance
Insurance needs can vary for different types of online businesses. In general, some key options to consider are:
Commercial general liability (CGL) insurance – A CGL policy provides broad general liability for businesses. This would cover someone outside the company who was "harmed" — someone who fell down and was injured at your warehouse, but may not extend coverage if someone’s computer was exposed to a virus at your site or whose confidential information was mishandled (professional liability). Professional liability coverage may come as part of the aforementioned CGL policy or may need to be purchased separately.
Property insurance – It can provide first-party coverage to cover loss of assets — virtual or real — owned by the company. Some business owners' package (BOP) policies include both CGL and property coverages.
Worker's compensation – If you have employees, state laws frequently dictate what type of coverage must be in place in case of an on-the-job injury.
Directors' and officers' insurance – Such a policy may be necessary if you have a board of directors whose individual liability should be limited.
Business loss insurance – This may provide coverage if your site goes offline and real losses are sustained. Note that there are variables with such insurance. Case in point: If you didn't pay your server bill and your site went offline, you're probably not covered. If a hurricane wiped out your server's facility in Florida, business loss coverage might kick in, but it might also be impacted by the contract you signed with your server host.
Defamation/libel coverage and/or coverage for infringement of copyright or trademark — This is worth considering, particularly if you are a content-oriented site that produces stories (such as a news site) or aggregates content provided by others. If you have a lively forum and you're concerned that comments about private citizens or businesses could create a liability, such coverage might be a wise choice.
Percentage of gross revenue allotted for insurance
There's no definitive benchmark since each business has different risk-management needs. The staff at Euclid Managers, LLC estimates 2 to 8 percent of gross revenues would be allocated to insurance needs — but that would vary widely based on the size of operation.
Hutchins and Callahan have the same advice for ecommerce merchants: Don't give up when you search for insurance options. Though the marketplace has been slow to respond to ecommerce needs, times are changing — insurance companies continue to launch new programs, which join the options provided by specialty carriers already catering to online businesses.
"[Insurance] agents are becoming more familiar with ecommerce," Callahan said. "There is now a growing network of wholesale insurance brokers who are specialists."
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