Do you remember that scene in Dumb and Dumber where Harry licks the ski chair and Mary has to rip his tongue off the pole? That scenario is pretty on par with how many sellers feel when picking an insurance policy for their start-up business. Just do it quickly and hope it doesn’t hurt too bad.

But we believe new sellers feel that way because they don’t understand what they’re getting into. Choosing proper coverage for your online business is really important, and while it may not be an exciting venture, it certainly doesn’t have to be painful. Once you arm yourself with the information needed to make an informed decision, working with your insurance broker or agent can be impowering. 

And from an insurance broker’s perspective, it helps us help you when you know what’s going on. As such, we created this blog to inform and empower our sellers. That way, when it’s time for you to pick a business insurance policy, you can feel less like Harry-stuck-to-a-chairlift and more like Harry-in-his-snazzy-blue-suit.  

How to Choose the Right Insurance Coverage for Your Start-Up

With so many insurance types and even more insurance carriers, choosing the right insurance coverage for your ecommerce startup can be, well, a giant headache. But to prevent you from  possibly feelings overwhelmed , let’s discuss factors you should first consider: 

What Type of Business Model Does Your Company Have? 

The type of insurance coverage you will need may be contingent on the type of business you have. Different business models come with different risks and liabilities, and while certain policies are important for all of them, some insurance types may be necessary for one and not another. For example: 

A Dropshipping business typically does not hold any inventory, instead relying on suppliers to ship products directly to customers. While this type of model will require general liability insurance, you may not need product liability insurance due to not manufacturing the products.  

A Private Label Business designs and manufactures its own products to sell online. This model may require product liability insurance to protect you against bodily or property damage claims. You may also want to consider cyber liability insurance to protect your business and customers against data breaches or sensitive information theft.  

An Online Arbitrage Business likely won’t need product liability insurance because you don’t manufacture the products. However, general liability insurance is recommended as well as cyber/data breach insurance due to the nature of this business model.  

A Subscription Box Business provides customers with a recurring shipment of products. If your business utilizes this model, it’s highly recommended that you carry product liability insurance. You may also want to consider business interruption insurance to ensure continual revenue if there are disruptions in your supply chain. 

A Service-Based Business may or may not need product insurance depending on whether your business offers products. You will still want general liability insurance as well as professional liability insurance (also known as errors and omissions insurance). Professional liability insurance covers expenses on claims that your services were wrong, misleading, or detrimental. 

How Big is Your Company/How Many Employees Does It Have? 

The size of your business can also impact the type of policies you need and those policy limits. Larger businesses with more employees and higher revenue may require higher limits of coverage to adequately protect against potential claims. But since this blog is focusing on start-ups, more than likely you won’t need various types of coverage and your premiums will be comparatively cheaper.  

What Kind of Products Do You Sell? 

The kind of business insurance you need is directly related to the type of products you sell and the associated risks with these products. For example, if you sell products that are considered high-risk (such as electronics, food items, children’s toys, etc.), you may need higher limits of product liability insurance. However, don’t make the mistake a lot of new sellers make, which is assuming your products are 100% safe. Even items like socks and hairbrushes can lead to lawsuits.  

What is Your Budget? 

Insurance premiums can be a significant expense for ecommerce startups, so it’s important to find coverage that fits within your budget. Consider shopping around and comparing rates from different insurance providers to find the best value for your business. This is also why we advise going with an insurance broker – they can do all the heavy-lifting for you.  


How Insurance Providers Decide If
They’ll Cover Your Online Business
 

Not only is it important that you know what YOU are looking for, it’s important you understand what insurance providers are looking for. Some insurers will take on high-risk companies while other ones won’t. Knowing what insurance companies factor in when deciding your eligibility and the cost allows you to go into insurance shopping with realistic expectations.  

The two main factors carriers will consider is insurability and cost.  

Insurability 

  1. Business Type: Insurers will evaluate the type of business and its associated risks to determine if they are willing to insure it. For example, businesses that sell high-risk products such as electronic equipment or nutritional supplements, may be seen as riskier to insure than businesses that sell low-risk products such as clothing or home decor.
  2. Claims History: Insurers will examine the claims history of the business to determine the likelihood of future claims. Businesses with a history of frequent or large claims may be seen as higher risk and may have a harder time obtaining coverage. If you are a start-up, you won’t have to worry about this.
  3. Risk Management Practices: Insurers will also evaluate the risk management practices of the business to determine if they have adequate measures in place to prevent claims. This may include things like employee training programs, quality control procedures, and cybersecurity measures. 

Cost

  1. Type and Amount of Coverage: The cost of insurance coverage will depend on the type and amount of coverage your business needs. Businesses that require higher limits of coverage or more specialized coverage likely will pay higher premiums.
  2. Industry and Location: The industry and location of your online business can impact insurance costs. Businesses operating in high-risk industries or in areas with higher rates of claims may pay higher premiums. If your business is strictly online, because your products are exposed to a much larger audience, your premiums and/or deductible may be higher for general and product liability insurance because your e-store is exposed to a much larger audience than brick-and-mortars.
  3. Business Size and Revenue: As we mentioned earlier, the size and revenue of your business can also impact insurance costs. Larger businesses with more employees and higher revenue usually pay higher premiums to adequately cover potential risks.
  4. Credit Score: Insurers may also consider the credit score of the business when determining insurance premiums. A higher credit score may indicate that the business is financially stable and less likely to file claims. 

Ultimately, insurance companies strive to balance the risks associated with insuring a particular business with the need to provide adequate coverage. By taking into account the above factors, insurers can make informed decisions on whether they are willing to insure your online business and how much to charge.

Insights from Fellow Entrepreneurs 

Obviously, we are an e-commerce insurance company, so naturally, we would try to push insurance products on you, right? While we won’t deny that we do encourage businesses to consider fully safeguarding their finances and assets, a lot of our motivation comes from seeing businesses lose everything because they didn’t get proper coverage.  

But don’t just take our word for it! Below are some insurance insights from successful e-commerce entrepreneurs that know first-hand how jarring and destructive a lawsuit can be on your business. 

Nick Swinmurn, founder of Zappos, recommends choosing an insurance provider that specializes in e-commerce or online businesses. These providers have a better understanding of the specific risks and liabilities associated with online sales and can provide more tailored coverage options. 

Alexandra Zatarain, co-founder of Eight, advises startups to consider the potential risks associated with their specific products or services. By identifying potential risks, businesses can select insurance coverage that adequately protects against those risks. 

Jen Rubio, co-founder of Away, recommends working with an insurance broker who can help businesses navigate the insurance landscape and find the best coverage options for their needs and budget. 

And lastly Melissa Kieling, co-founder of PackIt, suggests investing in insurance coverage early on in the startup process to avoid potential risks and liabilities down the road. 

Understanding Insurance Lingo 

When you begin insurance shopping, it’s a really good idea to understand (even if loosely) the terminology insurance brokers and providers use.  

While insurance agents are used to explaining certain terms, it will still behoove you to go into the process knowing what certain words mean. Heck, it could even be the difference between making a good decision or bad decision on what insurance plan you go with. 

For this reason, we created this insurance terminology cheat sheet to arm you with confidence when you begin the insurance negotiating process.  

There Is Room for Negotiation 

When you begin insurance shopping, it’s a really good idea to understand (even if loosely) the terminology insurance brokers and providers use.  

While insurance agents are used to explaining certain terms, it will still behoove you to go into the process knowing what certain words mean. Heck, it could even be the difference between making a good decision or bad decision on what insurance plan you go with. 

For this reason, we created this insurance terminology cheat sheet to arm you with confidence when you begin the insurance negotiating process.  

Many business owners (particularly new ones) aren’t aware that most insurance policies are not set in stone – there is usually a little room for negotiating.  

Say, for example, you know that the likelihood of your company getting sued is reasonably low due to the nature of your business and product/s. If you feel like the premiums on your proposed liability insurance plan are costly, you can ask your agent or broker if the carrier would be willing to increase the price of your deductible so you can pay less toward your monthly premiums.  

While the carrier may deny this request, it still doesn’t hurt to ask! 

Conclusion/TL;DR Summary 

  • Different business models have different risks and liabilities, and the type of insurance coverage you need may vary based on if your eCommerce business is private label, dropshipping, online arbitrage, subscription-based, or service-based.  
  • Aside from your business model, what kind of insurance policies you‘ll need and what those limits are will be determined by the size of your business, the products you sell, and your budget. 
  • Insurance companies evaluate insurability and cost when deciding whether to take you on as a client. Other factors include your claims history, your risk management practices, and even your business credit score. 
  • Before you purchase an insurance policy, successful entrepreneurs recommend that you:  

1- Choose an insurance provider that specializes in e-commerce
2- Identify potential risks in your business
3- Work with an insurance broker so you can shop around for policies more effectively
4- Invest in insurance coverage early on in the startup process.

  • Understanding insurance terminology when you speak with an agent/broker. Here is a cheat sheet we created to help with this. 
  •  There is usually some room for negotiation with your insurance policy. For example, if you would rather pay a higher deductible and lower monthly premiums, you certainly can ask!  

Choosing the right insurance coverage for your online start-up business may not be exactly “fun”, but it is an essential step in safeguarding your business and your finances. Don’t be overwhelmed at the prospect. Taking the time to understand the nuisances of the insurance world will not only help you make an informed decision – it can also save you a lot of money and heartache.  

We understand that as a start-up business owner, you are already inundated with having to make important business decisions at every turn; equipping yourself with the knowledge and lingo required to make a calculated insurance decision is a key investment for your future.  

Interested in having your current coverage reviewed or want to initiate the process of looking for new coverage? Our team at Ashlin Hadden Insurance can help! We have been working with Amazon and eCommerce sellers for over 5 years and know exactly what to look for when customizing a plan for your business needs. Click here to fill out the form or contact us at sales@ashlinhaddeninsurance.com. 

Author

  • McClain Warren

    McClain comes to the agency with years of knowledge and experience in the marketing and eCommerce world. She loves people (except Bob), networking, and creating eye-catching and intriguing content. She also loves pineapple on her pizza and will fight you if you say it's awful.

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