The Ultimate Shipping Insurance Guide For Ecommerce Business Owners

Jun 7, 2024

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2 min read

For ecommerce retailers, shipping can make or break the customer experience.

A study by Harvard Business Review in 2021 found that only 20% of consumers were forgiving online retailers for delivery delays and disruptions. And, more than 98% of ecommerce consumers say the delivery experience impacts their brand loyalty.

Whether you are a small business owner or a large-scale retailer, ensuring your packages reach their destination on time and in one piece is essential. Customers have little patience for delayed, lost, or damaged packages.

However, accidents happen: it’s virtually impossible to work with a shipper like USPS, FedEx, or UPS and encounter no issues over the course of doing business. Unforeseen circumstances, like natural disasters, labor strikes, or bad weather, can periodically derail the shipping process, leading to financial losses to your business.

Shipping insurance is one way to mitigate the risk to your post-purchase experience. Shipping insurance offers peace of mind to ecommerce retailers by protecting the merchant from financial losses due to lost, damaged, or stolen packages.

In this guide, we’ll outline the different types of shipping insurance, what kind of risks are eligible for reimbursement, and how to choose and calculate shipping insurance costs.

Understanding the Different Types of Shipping Insurance

Shipping insurance can safeguard your products from the time they leave the manufacturer to the moment the customer receives their delivery. Insurance coverage is essential for protecting your shipments from unforeseen risks that can occur during transit.

However, there are many types of shipping insurance available — and knowing which you need for your ecommerce business isn’t always obvious.

There are two main categories of shipping insurance:

Carrier-provided insurance, as in insurance coverage provided by major carriers like USPS, FedEx, or UPS.
Third-party insurance, such as coverage offered by a third-party insurance company, such as eBay’s ShipCover or Shipsurance.

Carrier-provided shipping insurance is typically included in the shipping cost, but the level of coverage may be limited. Comparatively, third-party shipping insurance may be more comprehensive than carrier-provided insurance but it will cost more.

Parcel insurance from major carriers

Shipping insurance costs are determined by the level of coverage that you purchase, the value of the goods being shipped, and the carrier. USPS, UPS, and FedEx all offer shipping insurance in some form or another. Depending on the product you’re shipping, you may need additional insurance to cover the value of your items.

USPS’ Priority Mail Express option offers free shipping insurance for up to $100 on all shipments. If the value of your product falls below this threshold, you don’t need to purchase additional coverage. For higher-value items, USPS offers additional coverage for up to $5,000 to protect against loss or theft. This level of coverage is priced at $12.15 plus $1.85 per $100.00 or fraction thereof over $600 in declared value.

UPS similarly covers items valued up to $100. If your product value exceeds $100, you can insure your package with additional coverage up to a maximum value of $70,000. This insurance coverage makes UPS a good option for premium ecommerce retailers.

Ecommerce platform Sella cites this pricing for UPS insurance coverage: “If you declare a value of $100.01 to $300.00, UPS will charge you $3.90. If the declared value exceeds $300, you will pay $1.30 for every additional $100 in value, including the first $100.”

Finally, FedEx explicitly does not offer shipping insurance, instead providing something called declared value. Declared value allows you to state the dollar value for your package. If the package is lost or damaged, FedEx will pay up to the declared value, minus any deductible. However, declared value is not insurance. It does not cover any losses that are not caused by FedEx, such as theft or damage that occurs before or after the package is in FedEx's possession.

FedEx labels include up to $100 liability coverage from FedEx. If your item’s declared value is over $100, you can purchase additional coverage for up to $50,000 from FedEx.

Third-party shipping insurance

Third-party shipping insurance can supplement or replace carrier insurance. In this scenario, an ecommerce merchant purchases an insurance policy from an insurance company. The policy specifies the amount of coverage that you are purchasing, as well as the types of losses that are covered.

When a package is lost, damaged, or stolen, you file a claim with the insurance company. The insurance company investigates the claim and, if it is approved, pays you the amount of the loss, up to the policy limits.

Third-party shipping insurance typically covers a wider range of losses than carrier-provided insurance. For example, it may cover losses that are caused by theft, loss, damage and vandalism, delays, and inclement weather.

Third-party shipping insurance also typically offers more flexible terms and conditions than carrier-provided insurance. For example, you may be able to purchase insurance for a specific shipment or for a period of time. Popular third-party shipping insurance companies include Route, Shipsurance, Shippo, and Secursus.

Factors to Consider When Choosing Shipping Insurance

As you vet your options, it’s crucial to consider the coverage options available to protect your valuable shipments. Different shipping carriers and insurance companies will provide different levels of coverage depending on your shipping volume, type of product, and service area.

Here are some important factors to consider when selecting shipping insurance.

Value of the shipped items

Determine the total value of the items you typically ship. For instance, a clothing retailer has lower-value items than a custom furniture designer. Make sure the insurance coverage you choose adequately reflects the value of your product line. Underinsuring can leave you with significant losses in the event of damage or loss, while overinsuring can result in unnecessary expenses.

Likewise, some items may be more susceptible to damage during transit, while others may be high-value or irreplaceable. Different insurance options are available to cover various types of goods, including fragile items, electronics, or perishable goods.

Shipping method and destination

Different shipping methods (ground, air, sea) come with varying levels of risk. International shipping, for instance, can be exposed to a higher risk of mishandling or customs delays, making robust insurance a necessity.

Ensure that your insurance policy covers the specific shipping methods you use most frequently. If you ship internationally or to areas with higher shipping risks, such as regions with extreme weather or political instability, you may need additional coverage. Verify that your insurance policy includes coverage for shipments to these destinations.

Carrier coverage and limitations

Review the liability coverage provided by your main postal service insurance policy (e.g., UPS, FedEx, USPS). Some shipping services offer limited liability coverage. If that coverage is insufficient, you may need to supplement it with an additional policy from a third-party insurance company.

If you choose to work with a third-party insurance company, make sure the maximum coverage provided aligns with the value of your typical shipments. If necessary, consider purchasing excess coverage or an umbrella policy to cover amounts exceeding the standard limits.

No matter what insurance provider you choose, review the policy's terms and conditions, including any exclusions or limitations. Some insurance policies may not cover certain types of damage, such as that caused by improper packaging or handling.

Claims process

If (and when) something does go wrong, how easy is the claims process? Research the reputation of the insurance provider. Look for customer reviews and ratings to gauge their reliability and customer service. Evaluate the ease and efficiency of the claims process. A streamlined claims process can save you time and reduce the hassle of filing a claim when issues arise.

By carefully considering these factors, you can find shipping insurance that best aligns with your specific e-commerce business needs and risk profile and protects your shipments.

How to Calculate Shipping Insurance Costs

There are a few factors that determine the cost of shipping insurance.

First, the declared value of the shipment is used as a baseline for the insurance cost. The higher the declared value, the higher the insurance premium. It makes sense: an expensive piece of tech should have a higher shipping cost than a bag of pet food, for instance.

Along with the value, the weight and nature of the shipped item also determines shipping costs. Heavy items and fragile will have higher insurance rates than durable and lighter packages.

Typically, the insurance rate is a percentage of the declared value. For example, if the declared value is $1000 and the insurance rate is 1%, then the cost of insurance would be $10. Carrier insurance rates are slightly higher, around 3% of the declared value.

Next, the shipping destination plays a role in the cost calculation. The further the package has to travel, the higher the premium — with international shipments generally incurring higher premiums. Likewise, different shipping methods (e.g., ground, air, sea) come with varying levels of risk, and insurance premiums may differ accordingly.

By carefully considering these factors, ecommerce retailers can make informed decisions about shipping insurance, striking the right balance between the cost of shipping and insurance options to ensure your shipments are adequately protected.

Tips for Filing Shipping Insurance Claims

Despite doing this research, validating your customers’ addresses, and packaging everything carefully, there may come a time when a package goes missing or gets damaged. And, when that happens, you’ll need to file a shipping insurance claim.

Before you file a claim, make sure the insurance you have covers the incident. Shipping insurance typically does not cover loss due to negligence by the shipper or the recipient – meaning if the goods were packed incorrectly or the recipient didn’t handle the package properly after it was delivered, your insurance doesn’t apply. Likewise, “acts of God” won’t be covered by shipping insurance.

Once you’re clear, document everything. Take clear photographs of the damaged items, their packaging, and any visible shipping labels or tracking numbers. Retain all relevant documents, such as invoices, receipts, packing slips, and the original shipping labels. Record the date and time of delivery or pickup, as well as any evidence of tampering or mishandling. Create a detailed description of the contents and their value.

Even if you’re working with a third-party shipping insurance company, retain any communication with the carrier and note down tracking numbers for reference.

Next, contact the shipping insurance provider promptly. The sooner you file claims, the sooner the insurance company can start investigating. Submit all your documentation as well as a clear description of what happened. Keep a record of all communications with the insurance provider, including email correspondence and phone call details. This can be helpful for reference and ensuring a clear line of communication.

Follow-up regularly – this process can take time! And, if you are not satisfied with the outcome of the claim, you may be able to appeal the decision. The insurance company will have a process for appealing claims.

Additional Considerations for International Shipping

International shipping adds a new level of complexity to calculating shipping insurance. Logistics providers, customers, and ecommerce retailers alike have to navigate the intricate web of customs and import regulations. It can be a hassle — but once you learn the rules, you can deliver a positive customer experience to those overseas.

When shipping goods internationally, you may be responsible for paying customs duties and taxes in the destination country. These fees can vary depending on the country and the value of your shipment, so it is important to factor them into the cost of shipping.

Likewise, some countries have strict import regulations. You may need special permits or licenses before shipping goods to overseas markets. These regulations can vary depending on the type of goods being shipped, so it is important to check with the customs authority of the destination country before shipping.

International shipping partners, such as DHL, will offer different shipping insurance options. Often, these insurance options are more expensive and increase with the value of your package.

You may decide shipping overseas isn’t worth the investment. If you want to restrict your geographic parameters, a tool like Address Validator can help. Address Validator is a user-friendly API that installs directly into your checkout process, verifying a customer’s address with a prompt. Address Validator prevents invalid addresses and blocks undeliverable addresses, such as ship stations or international areas that you’ve restricted.

Final Thoughts

Shipping insurance is a worthwhile investment for every ecommerce merchant to consider. In the US alone, more than 1.7 million packages go missing on a daily basis, adding up to $25 million in lost goods and services. Protect your business from the costs of shipping mishaps with carrier or third-party insurance policies.

And, make sure you only ship to addresses that are verified and valid. Learn more about Address Validator and try our free demo to get started.

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Ellie Ho

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Content Marketing Specialist

November 12, 2024

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3 min read

The Ultimate Shipping Insurance Guide For Ecommerce Business Owners

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