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Major Legal Risks to Avoid When Selling Products Online

Rebecca Hosley

Rebecca Hosley is a content writer for Insureon, an online small business insurance agency. She is based in Chicago and writes frequently about small business insurance and tech startups.

Selling products and services online allows business owners to reach a much larger audience than they could with just a brick-and-mortar location. Although casting a wider net can lead to sales growth, it can also increase a business owner’s liability. If a customer is unhappy with a business owner’s services, or injured by a defective product, the customer could sue. That’s a scary prospect.

According to a joint poll by Insureon and Manta, 43 percent of small businesses have experienced significant revenue growth as a result of online sales. A boost in sales is beneficial for a company’s bottom line, but it also increases their chance for a product liability lawsuit. There are several ways business owners can protect themselves against a potential lawsuit, such as using contracts, putting quality control measures into place, and purchasing liability insurance.

Here are two types of legal risks to protect yourself against if you’re in the ecommerce business:

legal-risks-ecommerce

Product Liability Lawsuits

Any merchant that sells goods could be sued if a customer is injured or sickened by a product that was purchased from the business. This could include an online meal-delivery service that unknowingly delivers a salad with contaminated romaine lettuce, or maybe a toy shop that sold a child’s chemistry kit online with dangerous chemicals.

There are three main categories of product liability claims:

  • Defectively manufactured products. For example, a chair with a defective screw that caused a leg to give out, resulting in someone falling and getting injured.
  • Defectively designed products. This could include sunglasses that don’t provide adequate protection against ultraviolet rays.
  • Failure to provide adequate warning or instruction. If a manufacturer is aware that its curling iron could overheat and become a fire hazard if left on longer than eight hours, but the packaging doesn’t include a warning, a consumer could sue for damages from a fire caused by the device.

Even if the business owner that sold the product is simply the retailer and not the manufacturer, a customer might still sue since lawsuits often target every party in the supply chain.

How Sellers Can Limit Their Exposure to Product Liability Lawsuits

Sellers can limit their liability by taking certain precautions. These include:

  1. Testing and quality control checks to ensure that any products they sell are safe
  2. Periodically evaluating their sources to make sure they are providing safe components or products
  3. Properly labeling packaging with any necessary warnings or disclosures

Another way small business owners can protect themselves against the high cost of a lawsuit is with product liability insurance. This coverage, which is typically included as part of a general liability policy, can pay for:

  • Attorney fees
  • Medical damages owed to the injured party
  • A settlement, if it makes sense to resolve the lawsuit instead of fighting it in court
  • Financial damages if the case goes to trial and the business owner loses

Although this policy can help cover the cost of most lawsuits related to a defective product, it doesn’t provide coverage for product recalls. Business owners would need to purchase a separate product recall insurance policy to secure that specific coverage.

Professional Liability Lawsuits

Customers can also sue if they are are unhappy with a service provided by a professional—that includes contractors, dentists, or any other profession that provides a service. Professional liability insurance (also known as errors and omissions insurance) can pay legal expenses if a business owner is sued over claims that the business:

  • Made a mistake
  • Delivered services that were late or incomplete
  • Never delivered services as promised
  • Went over budget

For instance, if a web designer is hired to create a new website for a client they could be sued if the website contains several bugs, causing pages to not load properly, or the entire site to crash; the site was delivered late, causing a two-month delay in the client launching their ecommerce platform; or they failed to finish the website at all, or created one significantly different than what the client requested.

Business owners can also be sued over something as simple as a misunderstanding. For example, let’s say the web designer was hired to create a new website for a coffee shop. The designer created a bare-bones contract that simply stated that a new website would be delivered within 60 days. But after work commenced it became clear that the client wanted a much more elaborate site than the designer anticipated.

The designer was unable to complete all those elements in 60 days, and because the contract didn’t include any language outlining the project scope, the coffee shop owner sued, claiming the designer was in breach of contract.

How Sellers Can Limit Their Exposure to Professional Liability Lawsuits

One way to help prevent these types of lawsuits is by creating a strong contract that clearly defines a project’s parameters, including any project milestones and specific deadlines that need to be met. It’s also a good idea to insist that any changes requested by the client be made in writing. That way, there’s a paper trail should the matter ever end up in court.

Professional liability insurance can cover business owners’ legal expenses if they are sued over the quality of their work by paying for:

  • A lawyer
  • Court fees, including expert witness testimony
  • Judgments against a business owner who loses a lawsuit

If You Sell Online, Have the Right Liability Policies in Place

Liability coverage is an added expense for business owners, but there are ways to save on small business insurance, including bundling policies and comparing quotes from multiple carriers. And by having the right liability policies in place, business owners could potentially save themselves thousands of dollars in legal fees if they are hit with a liability lawsuit.

Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.

Rebecca Hosley

Rebecca Hosley is a content writer for Insureon, an online small business insurance agency. She is based in Chicago and writes frequently about small business insurance and tech startups.

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