Angela Bolger bought a replacement battery for her laptop from a third-party seller on Amazon. She alleged that after several months it exploded and severely burned her to the point where she was hospitalized.

Kisha Loomis bought a hoverboard (A two-wheeled, electric, portable devices that are also commonly known as self-balancing scooters) through a third party seller on the Amazon marketplace from a Chinese company known as SMILETO. Her son charged it in her bedroom, then the hoverboard, as well as the plaintiff’s bedroom, caught fire. While fighting the fire, Loomis suffered burns to her hand and foot.

A mother filed a lawsuit against popular retail site after her son was strangled and killed by an item purchased from an E-commerce site. The child was strangled to death when a necklace he was wearing around his neck tightened and did not release.

There have been so many such incidents globally as well as in India particularly after March 2020 when much of the world went into lockdown, forcing many businesses to temporarily shut down. Traditional shopping became difficult, scary and more and more people became increasingly inclined to shop online. The fact that consumers were already embracing Amazon and other online retailers with open arms made this transition considerably easier. Amid slowing economic activity, COVID-19 led to a surge in e-commerce and accelerated digital transformation. As lockdowns became the new normal, businesses and consumers increasingly “went digital”, providing and purchasing more goods and services online, raising e-commerce’s share of global retail trade.

There is no doubt that the arrival of e-commerce has impacted our society, making it easier than ever for people to buy and sell all imaginable products and services without having to do so at a particular physical location. It has become one of the most crowded start-up spaces over the past few years and their growth has not happened without challenges and risks associated with it. So let us look into various contours of e-commerce analyse the issues involved.

What is E-commerce

E-commerce (electronic commerce) is the buying and selling of goods and services, or the transmitting of funds or data, over an electronic network, primarily the internet. In other words, E-Commerce refers to a mechanism that mediates transactions to sell goods and services through Internet/ Electronic mode.

Online e-commerce marketing is a place or a website where there are many sellers and buyers trading through the same website. One can find different brands of products coming from multiple vendors, shops or person showcased on the same platform. The marketplace owner is responsible for attracting customers and the processed transactions, while the third-party vendors deal with the manufacturing and shipping. Online marketplace streamlines the selling through one simple portal, where the manufacturers sell their products directly to the consumers avoiding any stocks holding.

An e-commerce company does not necessarily manufacture, sell, or distribute these products and today globally there are more than 160 such e-commerce websites such as Amazon, e -Bay, Walmart, Flipkart etc. engaged in selling various products and services across the world.

We now discuss Challenges and various risks associated with E- commerce and their insurability.

Everything is not different when e-commerce is compared with traditional stores. There are some risks in both business models, and some can be avoided by going on- line like the risk of customer’s slipping and sustaining injury in a physical store. Further, it is cost effective and time saving due to elimination of various intermediaries, saving of fuel and time consumed in travelling for purchasing the desired goods/services.

E-commerce has been growing exponentially particularly after the pandemic, making the consumers more digitally savvy and simultaneously, more aware of their rights. It will continue to grow in the coming years and recent global developments may see e-commerce platforms face several challenges and increased risk of liability

Are Marketplaces Like Amazon Liable for Product Defects?

The question is whether an online sellers would also need to buy insurance. The answer is – much like regular retailers, e-commerce businesses also need to worry about product liability issues because any product or service sold can malfunction and result in some type of injury whether someone is selling toys or software. After all, if a product is defective, the manufacturer is liable and in case of online selling besides retailers, Online retailers are equally susceptible, even if they merely provide a platform and the manufacturer or seller is using the platform to sell their product. Further, Consumer protection laws in most parts of the world are also evolving to make online retailers as the first port of call for any injury or damage caused by the products sold, irrespective of who made them.

Coupled with evolving product liability regulations around the world, liability suits have become very common in e-commerce business and with the evolving Product Liability Regulations, manufacturers, exporters, retailers or even online marketers have become vulnerable to lawsuits. Let us now look into the risk to which on-line retailers are exposed and examine their insurability

In India ,Consumer Protection Act 1986  was amended in 2019. On 23rd July 2021, the Government also notified ‘Consumer Protection (E-Commerce) Rules, 2020′ as part of the Consumer Protection Act, 2019 and henceforth these rules will be applicable to all electronic retailers registered in India or abroad but offering goods and services to Indian consumers.

The Consumer Protection Act 2019 applies to buying/selling of goods or services over the digital or electronic network, including digital products [s.2 (16)] and to a person who provides technologies enabling a product to engage in advertising/selling goods/services to a consumer.

Various stakeholders engaged in e- commerce have been defined in the Act as under:

Consumer- A person who buys any goods and hires or avails any service online through electronic media [S 2(7)].

Seller- The electronic service provider is product seller and has the same duties, responsibilities and liabilities as a product seller [ S2(37)]

Unfair Trade Practice -Refers to Electronic Service Provider disclosing to another person any personal information given in confidence by the Customer. [ S2(47)]

Therefore, in terms of the revised Act, any Consumer may bring a Product Liability action against a product manufacturer or a product service provider or a product seller, as the case may be for any harm caused to him on account of a defective product and seek financial compensation. Product Liability Insurance is therefore of paramount importance for an e-commerce company.

Product Liability Insurance

Product liability insurance is designed to protect a business from financial liability when a product they manufactured, distributed, sold, imported or shipped causes property damage or bodily injury to a consumer. While claims of negligence may be used in a product liability claim, it is also not uncommon in certain jurisdictions to use the legal doctrine of strict liability in product liability lawsuits.

In fact, this was its main argument in the case of Bolger vs Amazon when it was sued for a defective laptop replacement battery that exploded and burned one of its customers. The product was from a third-party seller named E-Life.

Ms Bolger filed several causes of action, including strict liability, against both Amazon and the third-party seller. Strict liability is a legal theory that allows consumers to hold sellers or manufacturers of defective products accountable without proving negligence. A victim can recover damages (compensation) even if the manufacturer, or seller, in this case, used appropriate care. They must only demonstrate that the product had a defect, the defect caused the victim’s injury, and the defect made the product unreasonably dangerous.

The trial court initially agreed with Amazon that they were not strictly liable because they did not distribute, manufacture, or sold the laptop battery. This decision was however reversed by the Court of appeal in August 2020 because the Court concluded that Amazon may not have been the seller but was a critical link in the chain of distribution and under established principles of strict liability, Amazon should be held liable if a product sold through its website turns out to be defective.”

Amazon appealed this decision, but the California Supreme Court denied their petition for review. The Court said that since the company is a major player in the distribution of products and that it’s in the position to put pressure on manufacturers when the products are unsafe.

Similarly, in Kisha Loomi’s case too landmark decision in April 2021 made by California’s Court of Appeal (Second Appellate District) reversed a previous trial court decision similar to the Bolger v. case and gave the identical ruling.

Product Liability Insurance, therefore, as a part of the general liability is of paramount importance for E-commerce entrepreneurs to have protection in cases like that of Angela Bolger and Kisha Loomis. Any manufacturing defects, design flaws or improper/inaccurate instructions or warnings can generate severe liabilities for any e-commerce business, regardless of their role in the distribution chain.

It appears Amazon has now asked Sellers to provide proof that they have Commercial General Liability Insurance that shall cover up to $1 million per occurrence. (FYI, Commercial General Liability insurance covers businesses for bodily injury, personal injury, property damage resulting from their business operations)

Intellectual Property Rights Insurance– It is another risk factor in e-commerce, even if Company is insured against the risk of infringement of patent, trademark, copyright, right of publicity, and so on. For example, an e-commerce store could face liability claim related to a third party’s advertisement hosted on its website. If the advertisement is infringing on some other party’s intellectual property and e-commerce Company is allowing that advertisement to be featured on its website, it could be Company’s problem as well. There’s a lot of money involved in IP infringement lawsuits and may face hundreds of thousands worth of liability.

Cyber Risks Insurance – E-commerce websites collect lots of personal information from customers including their bank, Credit card details and process business transactions online. Such activity exposes the customers to risks of hackers and cybercriminals wherein sensitive personal information may be leaked, stolen or used elsewhere. All potential lawsuits, fines, penalties settlements, discovery and investigation expenses arising out of such Cyber attacks and or Data breach maybe covered under Cyber Insurance Policy of e-commerce company.

D&O liability Insurance- Like any other start up or industry, e-commerce company also need to protect its top management against lawsuits arising due to breach of fiduciary duty or mismanagement. D&O Insurance allows them to run the company aggressively and confidently without the fear of personal financial loss.

Employees’ Compensation Insurance – In case an e-commerce company has employed workers, it is necessary to buy Employees’ Compensation Insurance to cover the liability if any arising due to death, medical costs and loss of wages resulting from an employee’s work-related injury.

Marine Cargo Insurance:  In case E-commerce company owns a warehouse and rely upon a third party to store their goods, or ship products directly to customers and other distributors, then it is necessary to go for cargo insurance which will provide protection from physical loss of inventory, while in storage or being transported.

Way forward

In the years to come, we will look back at 2020 as the moment that changed everything. Nowhere else has unprecedented and unforeseen growth occurred as in the digital and e-commerce sectors, which have boomed amid the COVID-19 crisis.

The popularity of e-commerce is not a new story. The big players—Amazon, Walmart, Alibaba, and others have been rapidly expanding in the last few years and COVID-19 pandemic, has accelerated the growth of the convenience of online shopping movement. Since more and more businesses are done on-line, stricter regulations may be expected in the future and litigation relating to products sold/purchased online, is bound to put pressure on E-commerce entrepreneurs, just like all other business owners to deal with several legal issues.

Countries are gradually relaxing restrictions, but the future is still uncertain. Even businesses that are reopening have restrictions enforcing social distancing, the wearing of masks, and limits on how many customers can enter a space at one time.

There’s a good chance that this trend will continue in the post-quarantine world. The advantages of online shopping aren’t going to disappear even when retail businesses reopen full. The e-commerce companies need to assess the risk exposure of their enterprises, understand their legal obligations in the jurisdictions where they operate and seek appropriate insurance coverages enabling them to run their business aggressively and confidently without any fear. There is huge scope for insurers too in India to venture into this LOB and harness the potential because awareness of Consumers towards their rights is also increasing simultaneously and it is incumbent upon General Insurance Industry in India to increase their Liability portfolio which is still trailing at 2% of the GDP in India.

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