Running a traditional business necessarily involves risk. Whether it is a child choking on a product in your store or someone slipping on a wet floor, exposure to liability is such a concern that buying liability insurance is part of any “to do” checklist when launching a business.
The same is true for online businesses.
While a customer is unlikely to sue you for slip and falls, lawsuits for defamation, copyright infringement, trademark infringement, and other legal claims are common in the online business arena. Operating online without a liability insurance policy is dangerous. Any lawsuit could wipe out your business and, potentially, force you into personal bankruptcy as well. In light of this, let’s take a look at the essential elements of a liability policy.
Liability insurance is a bet. The insurance company underwriting the policy is betting you will not make a claim during the term of the policy, which is usually one calendar year. You, in turn, are willing to pay a certain amount – a premium – for the comfort of knowing there is a pool of money to back your business should a legal dispute arise. The exact sum of money depends on what the insurance company is willing to provide and what you can afford to pay. Companies offer policy quotes in this form:
- 100,000/100,000 – $1,200 annual premium
- 1,000,000/3,000,000 – $2,600 annual premium
- 5,000,000/5,000,000 – $3,500 annual premium
From left to right, the first figure represents the coverage provided per claim. If you purchase the $1,000,000 policy, the insurance company will pay up to $1,000,000 to defend a claim against you.
The second figure from left to right represents the total amount the insurance company will pay out on your behalf for the covered period regardless of how many lawsuits people file against your business. Let’s assume you offer a product online, and consumers complain the product scalds their skin. Five lawsuits are filed against you seeking two million dollars in damages each. Your insurance policy provides $1,000,000/$3,000,000 in coverage. If the first lawsuit settles for $900,000, the second for $900,000, and the third for $600,000, you will have used a total of $2.4 million of coverage leaving you just $600,000 for the remaining two lawsuits. Once you use the $600,000, your business is responsible for covering any subsequent defense costs, settlements, and judgments. In short, buying as much coverage as possible is often the best move.
Finally, the premiums noted in our example above are the amount you must pay to the insurance company to obtain the coverage. Companies will quote the premiums as an annual cost, but monthly payment plans are almost always available to ease the financial burden.
Isn’t A Business Entity Enough?
No. A business entity is designed to create a shield between the liabilities of a business and your personal assets. However, the guard does not protect the company. If no insurance policy is in place, the business must pay a defense attorney directly while also coming up with the money for any judgment or settlement. For most companies, this scenario results in a trip to the bankruptcy court and the loss of all the hard work and money you’ve put into building the company over the years.
Most insurance carriers will suggest their insurance policies for brick and mortar companies also are a fit for online businesses. Eh, such claims tend to ring hollow. For example, these policies may provide coverage for slip and fall claims by customers, but when was the last time any of your customers came to your premises? The answer for most online businesses is never, so why pay for such coverage?
A better approach is to obtain a policy explicitly designed to cover the risks online businesses face – infringement claims, hacks, denial of service attacks, defamation, etc. Hiscox.com is known to offer such policies. I am not endorsing Hiscox nor have I purchased coverage from them [lawyers must have specialized insurance]. I have read a few of their policies, however, and the company seems to understand the risks faced by online businesses. Give them a try or ask your current insurance broker about your options.
Just make sure you are covered.
Richard A. Chapo, Esq.