Understanding Commercial General Liability Insurance

Selling on Amazon can be a great opportunity for businesses to reach a large audience and increase sales. However, with this opportunity comes risk. As a seller, you may face complaints, or even lawsuits, if a product you sell causes harm to a buyer—whether physical, emotional, or financial. This is where Commercial General Liability (CGL) Insurance comes into play.

In this article, we will explore the necessity of CGL Insurance for Amazon sellers, what it covers, the platform's requirements for insurance, and how to protect your business from potential claims.

Why Amazon requires sellers to have CGL insurance

Amazon's introduction of mandatory insurance for sellers ties closely to their A-to-Z Claims process—a guarantee of quality for purchases made on the platform. Buyers can file complaints if they find that the product doesn't meet their expectations or causes some form of damage. While some complaints may be unfounded, others may have merit, and sellers are at risk of facing large financial losses if a buyer sues or if an entire batch of products needs to be recalled.

CGL Insurance acts as a safety net for sellers, covering various types of claims and minimizing financial risks. For Amazon, requiring sellers to have insurance provides a layer of protection for the platform itself. In 2020, a landmark lawsuit established that Amazon could be held liable for defective third-party products sold on its site, so requiring CGL insurance helps mitigate Amazon’s exposure to these kinds of legal disputes.

Who needs CGL insurance on Amazon?

According to Amazon’s rules, sellers whose gross revenue exceeds $10,000 in any month are required to obtain CGL insurance. Previously, this threshold was set over a three-month period, but Amazon changed the policy to encourage timely insurance compliance.

When you reach this threshold, Amazon will send you a notification via email, and you'll have 30 days to acquire the necessary insurance policy. Failing to do so can result in serious consequences, such as:

• Suspension of payouts to your account.
• Temporary or permanent suspension of your seller account.

Avoiding these sanctions is crucial for maintaining your business. Once an account is blocked, getting it unblocked can be a complicated process. It’s better to ensure compliance by getting insurance within the stipulated time.

Types of insurance coverage required on Amazon

Amazon sellers typically encounter two types of claims:

1. Product liability.The buyer uses a product as intended, but it causes harm or damage.
   

Example: a buyer uses a blender purchased on Amazon, and during use, their finger gets injured by the blades.

2. Defective Product. The product has a manufacturing defect that causes harm.
   

Example: a faulty electrical device sparks a fire in the buyer’s home, resulting in property damage.

To protect against these situations, Amazon requires two types of insurance: General Liability and Product Liability Insurance. It's recommended to have both types of policies to cover any potential risks comprehensively.

General Liability Insurance (GLI)

GLI, also known as Business Liability Insurance or Commercial Liability Insurance, protects sellers if buyers sustain injuries, emotional distress, or property damage from using their products. Some instances covered by GLI include:

• Bodily injuries resulting from product usage.
• Property damage caused by the product.
• Intellectual property infringements such as violations of copyrights or trademarks.

If you operate without GLI, you expose yourself to substantial legal costs, including attorney fees, product recalls, and damage to your brand reputation.

Example
In 2014, Ace Bayou Corporation had to recall over 2 million bean bag chairs after they caused two deaths by asphyxiation. The design allowed children to unzip the bags and climb inside, where they suffocated on the filling. The recall was expensive and impacted the company's reputation.

Product Liability Insurance (PLI)

PLI focuses on covering claims arising from defective products. It protects sellers if a faulty item causes physical injury or property damage. Some situations covered by PLI include:

• Contaminated food or drugs leading to health issues.
• Apparel made from harmful materials causing allergic reactions.
• Incorrect product instructions resulting in injury.
• Electrical appliances with malfunctions causing fires.

Example
In 2009 and 2010, Toyota faced massive recalls due to defective floor mats and accelerator pedals in their vehicles. Over 5 million vehicles were recalled, causing massive financial losses and reputational damage.

Amazon's requirements for insurance providers

Amazon requires sellers to ensure that their insurance provider meets specific standards. Here's what to look for when choosing a provider:

1. Financial rating. The insurer should have an "A" rating from S&P or AM Best. If these rating agencies don’t operate in your country, a local equivalent rating is acceptable.
2. Global claims processing. The insurance company should be able to handle international claims.
3. Coverage standards. Your insurance policy must meet the following criteria:

• Aggregate limit of at least $1 million.
• List "Amazon.com Services LLC, its affiliates, and successors" as additional insured parties.
• The deductible should not exceed $10,000.
• Include all products sold on Amazon in the coverage.
• The name on the policy should match the legal entity on Amazon Seller Central.

Your insurance provider is also required to inform Amazon 30 days in advance of any changes, cancellations, or non-renewals of the policy.

How to submit the proof of insurance?

After purchasing your insurance, you'll receive a Certificate of Liability Insurance, which you must upload to your Amazon Seller Central account. This document verifies that you are covered under an active insurance policy.

Be aware that Amazon may contact your insurer to confirm the authenticity of your policy, so it's crucial to work with a reputable insurance provider. Submitting fake documents could result in account suspension and leave you without protection in case of a claim.

Amazon's communication with insurers

Amazon has started directly contacting insurance companies to confirm the validity of seller insurance policies. Here's an example of a standard inquiry:

Dear Insurer,
You recently issued a Certificate of Insurance that the insured entity used to confirm liability coverage for products sold on Amazon.com. Please confirm that the following matches your records:

• Insured name: [Seller’s Name]
• Policy number: [Policy Number]
• Policy expiration date: [Policy Expiry Date]
• Type of insurance: COMMERCIAL GENERAL LIABILITY – OCCURRENCE
• Each occurrence limit: $ 1,000,000
  Your prompt response is appreciated.

Business Insurance Verification Team
Amazon.com

If the insurance company fails to respond or provides information about a fake policy, the seller’s account will be suspended.

Practical steps to protect your Amazon seller account

As an Amazon seller, securing CGL and PLI insurance is essential to safeguard your business against potential claims. Here are some practical steps to take:

1. Ensure the insurer meets Amazon's financial ratings and global capabilities.
2. Make sure the policy covers all necessary elements, such as product liability and general liability.
3. Upload your Certificate of Liability Insurance to your Seller Central account as soon as possible.
4. Be ready for Amazon to contact your insurance company for policy verification.

Final thoughts

Commercial General Liability and Product Liability Insurance provide critical protection for Amazon sellers. Whether it’s protecting you from lawsuits, covering damages caused by your product, or ensuring compliance with Amazon's policies, having the right insurance is a smart business decision.

At SellerSail, we understand the challenges of managing your Amazon business and navigating insurance requirements. That's why we offer free consultations to help you find the best solutions for your specific needs. Contact us today to learn more and protect your Amazon seller account from potential risks.