What Is Dropshipping Insurance for Side Hustles?

With its recent surge in popularity, dropshipping has been dubbed the ‘ultimate side hustle’.

CBC News notes that the practice has recently taken off as more young people want to be dropshippers, seeking out low-risk business models as a side hustle or an alternative to a typical day job.

Amazon Canada defines dropshipping as “an order fulfillment option that allows e-commerce businesses to outsource the processes of procuring, storing, and shipping products to a third party – typically a supplier.”

Dropshipping, in essence, empowers online sellers to operate without stocking inventory, while the dropshipper handles packaging and shipping. This flexibility is a key factor in its appeal to young entrepreneurs.

However, there are significant risks involved with the practice – especially if a product you sell causes a customer physical harm. For example, if you sell a skincare product through your online store that causes a customer to suffer an allergic reaction, you can be held liable for their medical expenses.

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That’s because you’re the “seller of record,” meaning you own the product before it’s shipped to the customer, even if you don’t physically handle or manufacture it. Should a customer file a claim or lawsuit against you for third-party bodily injury or property damage caused by a product, it could cost you thousands of dollars if you don’t have dropshipping insurance.

What Liability Risks Do Dropshippers Face?

There are many liability risks associated with establishing a dropshipping business, including:

• Product Liability: The most significant liability risks online sellers face are third-party bodily injury and third-party property damage claims from a customer.
  
  If a product is defective and causes a customer harm, you can be sued for damages. That’s because, as an online seller or retailer, you are financially responsible for any product you sell, distribute, or manufacture (including food), even if you didn’t create or handle the product or were aware it was defective.

• Intellectual Property (IP) Infringement: As an online seller or retailer outsourcing dropshipping services, as you build your online store, you may be using existing product photos and descriptions of the items you’re selling. It’s best to use your own photos and descriptions of a product. Otherwise, you could find yourself infringing on the original creator’s intellectual property rights (copyrighted images, logos, content) if you don’t have explicit permission to do so.
  
  Furthermore, since you don’t stock and handle the products you’re selling, how do you know if those products are not counterfeit goods? If they are, you could land in hot water and be sued, facing stiff fines or, in some cases, being jailed.

• Regulatory Compliance: As a retailer or online seller, you might be prohibited from selling certain products that are banned for sale in Canada or required to have a licence to sell certain goods. Failing to comply with provincial or federal laws governing what you cannot sell, import, or export can lead to severe legal consequences.

• False Advertising: Making misleading or false statements or advertisements about items you sell could result in customer complaints or lawsuits. For example, selling health and wellness products that don’t live up to their suggested benefits.

• Online Scams: You rely on suppliers to provide the goods you’re selling, but if you don’t verify those suppliers are reputable and credible, you could be unknowingly selling counterfeit or inferior goods, or those suppliers might fail to deliver products altogether. You could also fall prey to a customer’s chargeback scam, known as first-party or ‘friendly fraud’ – when someone purchases a product with their credit card, they dispute it or claim the product they bought was never received to get a refund while keeping the item.

How Does Dropshipping Insurance Protect Online Sellers?

Dropshipping insurance is a flexible policy designed to protect your business from costly claims and legal headaches.

The right policy can help cover financial losses from chargebacks, customer complaints, or legal claims related to product quality and fulfillment issues. It provides peace of mind by ensuring you’re not left paying out of pocket for unexpected problems in your supply chain.

A dropshipping insurance policy may include the following types of coverages:

• General Liability Insurance: General liability insurance covers third-party bodily injuries and property damages resulting from your business’s operations, unexpected accidents, or negligence. It includes personal and advertising injury liability to cover defamation or false advertising allegations.

• Product Liability Insurance: Product liability insurance may be included with general liability insurance or added to a policy. It covers third-party bodily injuries and property damages caused by any product you sell, distribute, or manufacture.  

• Cyber Liability Insurance: As an online seller leveraging dropshipping services, your business lives online. And the digital world is rife with many cyber threats that are becoming more sophisticated. Cyber insurance is designed to help you recover from cyber-attacks and data breaches that would otherwise cost you tens of thousands of dollars. 

• Cargo Insurance: Cargo insurance can protect your finances if the items or products you ship to customers in transit or store at a third party’s location are damaged or lost due to a natural disaster, fire, flood, theft and vandalism, customs rejections, or vehicle-related accidents. 

How to Get Low-Cost Dropshipping Insurance to Protect Your Finances

Zensurance is Canada’s no. 1 business insurance brokerage providing independent professionals, online sellers, entrepreneurs, and small businesses in hundreds of industries with the comprehensive, low-cost protection they need, including dropshipping insurance.

Fill out our online application for a free quote in less than five minutes and explore your options.

Our knowledgeable team of brokers will shop our partner network of over 50 insurers on your behalf to get the right policy for your business, customize it to suit your needs, answer questions, and ensure you’re covered if something goes wrong.