Product Liability Risk in eCommerce: What Online Sellers Need to Know

It’s no secret that the digital landscape is evolving at a rapid pace. High street shops closing down and tech giants like Amazon seemingly running the world. 

But as the online space continues to evolve, so do the challenges and risks associated with selling online. One such critical aspect that’s often overlooked is eCommerce product liability.

So we’ve put together this guide to shed light on the potential legal and financial implications of selling products online.

Understanding Product Liability Risk in eCommerce

As an online seller, it’s critical to recognize the significance of product liability. Overlooking this important aspect of your business can have a catastrophic impact.

But what is product liability and why is it so important?

Product liability refers to the responsibility that manufacturers, suppliers, and sellers are responsible for any damage caused by their products. Protection against product liability is not only about legal compliance, but also about ensuring customer safety, protecting your brand, and securing long-term business success.

When it comes to eCommerce, this liability extends to online merchants who resell products on digital platforms – even if they’re not the original manufacturer. According to the definition by Cornell University Law School, product liability claims can arise from design defects, manufacturing defects, and marketing defects.

• Design defects are inherent flaws that exist even before the product is manufactured. For instance, a toy designed with small detachable parts that pose a choking hazard for children

• Manufacturing defects arise from issues in the production process. An example would be a batch of electronic devices malfunctioning due to faulty wiring

• Marketing defects involve the failure to provide adequate instructions or warnings about a product’s potential risks. Like not warning consumers about potential allergy risks in a skincare product for example

Obligations of Online Sellers

As an online seller, you have a legal and moral duty to ensure the safety of the products you offer. This responsibility is not limited to the product’s design and manufacturing but also extends to how the product is marketed and represented to potential buyers. 

Accurate product descriptions, quality packaging, clear usage instructions, and appropriate safety warnings are all crucial. As a seller, you must also be aware of and comply with consumer protection regulations by meeting safety standards and communicating any potential risks of your products. 

The Impact of eCommerce Product Liability Claims

It was estimated that there were 28 million consumer product-related injuries in 2020 in the US alone. 

Even with the best intentions and the tightest quality control, there’s always a risk of product liability claims. Let’s go over some of the repercussions of a product liability claim:

1. Financial Implications

Product liability claims can lead to substantial financial losses. For a small business, especially those in the eCommerce sector, a single claim could be crippling. The immediate financial burden, if not adequately covered by insurance, includes legal fees, compensation to the claimant, and potential fines and penalties. 

But that’s just the tip of the iceberg. If your business is found liable, the subsequent increase in insurance premiums can strain its finances for years to come.

2. Reputational Damage

In the age of digital media, news travels fast. A single product liability claim can tarnish the reputation that a business has painstakingly built over the years. 

Negative reviews, media coverage, and word of mouth can deter potential customers, leading to a decline in sales. As an online seller, this is particularly concerning as platforms like Amazon and Walmart prioritize customer safety and may delist products or sellers that are deemed risky. 

3. Operational Disruptions

Addressing a product liability claim requires time and resources – the two most valuable things when it comes to running a business. 

A liability claim can divert attention from core business operations, leading to potential revenue losses while you focus on the claim or even coordinate a costly product recall. 

Real-World Examples of eCommerce Product Liability Cases

Product liability claims can come out of left field when you least expect them. Just take a look at these three famous examples:

1. FITURBO’s Hoverboard Incident: A hoverboard by consumer electronics company FITURBO caught fire and burned down their customer’s home

2. Buckyballs’ Safety Concerns: Buckyballs, a novelty “desk toy”, came under scrutiny when its rare earth magnets were ingested by and choked numerous children, resulting in injuries and, in some cases, fatalities

3. McDonald’s Hot Coffee Case: The case that cost McDonald’s $3 million and made international news when a customer was left with extensive 3rd-degree burns after spilling a scalding hot coffee

Proactivity: The Key to Product Liability Risk Management

The risks associated with product liability are becoming increasingly complex and the consequences evidently drastic. That’s why being proactive, rather than reactive is the cornerstone of managing these risks. 

Let’s go over 4 ways to protect your business from potential liability claims:

1. Product Testing and Quality Control

Before any product reaches the hands of a consumer, it should undergo rigorous testing to ensure its safety and functionality. This is not just about meeting regulatory standards but exceeding them. 

Thorough quality assurance (QA) prevents issues by preemptively identifying and rectifying potential defects. Quality control (QC) spots and corrects issues that couldn’t be prevented. Both of these programs should be regularly reviewed and adjusted to incorporate customer feedback and enhance product safety – even if you’re not the original manufacturer.

2. Clear Product Descriptions, Instructions, and Warnings

Every product, no matter how intuitive it may seem, should always be delivered with clear instructions. This ensures that the consumer uses the product as intended.

This is crucial at every stage of the buying process – from your online product descriptions to packaging and product inserts. 

Any potential hazards associated with the product should be clearly highlighted. This not only educates the consumer but also shields you from potential liability claims.

3. Staying Updated with Regulatory Changes

The regulatory landscape for eCommerce is dynamic. As online sellers, we must stay in the know about any changes in regulations – especially those related to product safety. 

This proactive approach ensures that our products always meet the latest safety standards, reducing the risk of non-compliance.

For a full picture of whether your product is subject to regulations, CPSC’s Regulatory Robot is a great tool to determine which safety requirements apply to your product.

4. Proper Documentation and Record-Keeping

Detailed records maintain a clear trail of every decision made, every change implemented, and every piece of feedback considered. 

Such records, which include manufacturing processes, inspection and testing records, and customer interactions, can be invaluable if you ever find your business defending against a product liability claim.

The Indispensable Role of Insurance for Online Sellers

Imagine launching a new product, and it becomes an instant hit. Sales are skyrocketing, and reviews are pouring in. But then a customer claims that the product caused them harm. 

Without the right insurance, such claims can lead to costly lawsuits, tarnishing your brand’s reputation and draining your financial resources. 

This is where product liability insurance plays a pivotal role in protecting you from any unforeseen risks.

General commercial liability insurance is the bedrock of eCommerce business protection designed to protect online sellers from third-party claims arising from injuries and property damage.

It’s essential to protect your venture against unforeseen product defects, ensuring peace of mind as your business grows.

Other Types of Insurance Policies for Online Sellers

Commercial Auto Insurance

What it offers: If your eCommerce business involves using vehicles for deliveries or any other business-related purpose, this insurance covers any damages or accidents that might occur.

Why you might need it: Delivering products is a crucial part of the eCommerce chain. Ensuring that this process is insured means that mishaps on the road won’t derail your operations or lead to unexpected costs.

Workers’ Compensation

What it offers: For businesses with employees, this insurance covers medical expenses and lost wages if an employee gets injured or falls ill due to work-related activities.

Why you might need it: Your team is your most valuable asset. Ensuring their well-being is not only a moral responsibility but also a safeguard against potential legal claims.

Commercial Property Insurance

What it offers: This insurance protects your business assets, including inventory and equipment, against potential damages or losses.

Why you might need it: Your inventory is the lifeblood of your eCommerce business. Protecting it ensures that unforeseen events, like natural disasters, won’t halt your operations.

Cyber Insurance

What it offers: In an era where data breaches are becoming increasingly common, this insurance offers protection against financial losses from cyber threats.

Why you might need it: Your online store holds sensitive customer data. A breach can not only lead to financial repercussions but also damage your brand’s trustworthiness.

Choosing the Right Insurance Provider

A trustworthy insurance provider that specializes in eCommerce shouldn’t be too much to ask. 

But how do you sift through the myriad of options and select a provider that truly understands the unique challenges and opportunities you’re facing? 

eCommerce Specialization

Traditional insurance models, often based on annual forecasts and upfront charges, struggle, or simply don’t attempt to cater to the specific nuances of online selling. 

This is where specialization comes into play. An insurance provider that specializes in eCommerce understands the intricacies of online selling — from the unpredictability of sales to the complexities of global supply chains.

Coverage Options and Liability Limits

Often, eCommerce platforms like Amazon and Walmart have specific coverage requirements that sellers must adhere to. Ensure you consider the right type and level of coverage to meet these requirements and ensure your business is adequately protected as your business scales. 

Unsure about platform-specific requirements? Head to our Amazon and Walmart guides to find out more. 

Cost

How much your insurance costs and how you’ll pay can both have a huge impact on your cash flow and your bottom line. Over-insuring eats into profits, while under-insuring leaves you vulnerable. So a transparent pricing model that adjusts based on actual sales ensures you get the best of both worlds and helps you avoid hefty upfront payments.

Customer Reviews

Authentic feedback from other online sellers gives you insight into the experiences of others in your shoes and the performance of an insurance provider, helping you gauge their reliability and efficiency.

Customer Support

In the world of insurance, questions and concerns are inevitable. A robust system with responsive, knowledgeable, and friendly customer service ensures your questions are answered and gives you confidence that they’ll handle claims in the same way. 

Why is this knowledge so pivotal? 

Simply put, being uninformed can lead to unforeseen legal repercussions. We live in a time where consumers are empowered and hold brands accountable for the products they sell, and this accountability does not diminish simply because a transaction occurs online. In fact, it’s quite the opposite. 

Informed sellers can not only navigate these waters with ease but also ensure their businesses are fully protected against potential liabilities. 

That’s why Assureful stands out. We eliminate guesswork with dynamic, pay-as-you-sell insurance tailored for the eCommerce landscape, Our policies offer unparalleled flexibility.