Shipping Insurance: What does it cost and is it worth it?

In the world of e-commerce, shipping is a lifeline that connects DTC businesses to their customers. As we previously discussed in our article on the frequency of shipment loss and damage with major US carriers FedEx vs. UPS vs. USPS, it's crucial to understand the risks involved. But what happens when something goes wrong? Enter the realm of shipping carrier insurance.

This post is part 7 of our ongoing series of parcel shipping guides for US-focused eCommerce and physical product brands. Our goal in this series is to help you become proficient in everything related to shipping via small parcel carriers like FedEx, UPS, and USPS in the United States.

Previous installments in this series include:

• Part 1: A basic comparison between FedEx, UPS, and USPS

• Part 2: A Detailed Overview of Service Levels with FedEx, UPS, and USPS

• Part 3: How FedEx, UPS, and USPS Calculate Shipping Costs

• Part 4: Demystifying Surcharges and Fees from FedEx, UPS, and USPS

• Part 5: Residential versus Commercial Deliveries: What You Need to Know

• Part 6: FedEx vs UPS vs USPS: Who Really Loses the Most Packages?

The Financial Ripple Effect of Lost & Damaged Shipments

The repercussions of lost or damaged shipments extend far beyond the immediate loss of the item. Direct damages, often the most apparent, are just the tip of the iceberg.

DTC sellers also grapple with the hidden costs of ramping up customer service operations to handle complaints and inquiries, which can strain resources and lead to increased operational expenses. Then there's the cost of replacing the lost or damaged items, not to mention the additional shipping charges for resending products to customers.

Furthermore, the brand's reputation can take a hit, leading to the potential loss of customer trust and loyalty, which can have long-term financial implications.

All these factors combined create a cascading financial impact that can significantly dent a company's bottom line. So, the question is, should you insure against these losses?

What is Shipping Insurance?

Shipping insurance is a service designed to protect shippers against potential losses from lost, stolen, or damaged packages. If an insured package doesn't reach its intended destination or arrives damaged, the shipper can be reimbursed for the declared value of the items in the package.

When preparing a package for shipment, one of the key decisions shippers face is whether to purchase shipping insurance. This insurance is typically offered at the point of shipment, whether you're shipping through a physical carrier location, an authorized shipping outlet, or even online through the carrier's or other third party’s digital shipping platform.

The process is straightforward: once you've provided details about the package, such as its weight, dimensions, and destination, you'll be prompted to declare the package's value. Based on this declared value, the carrier will calculate the insurance cost. If you opt for insurance, this amount is added to the overall shipping cost.

The declared value of a shipment signifies the highest amount a carrier is liable for in case of any issues with that particular shipment. This encompasses scenarios such as loss, damage, delays, or even instances where the package is delivered incorrectly. If you're the sender, the onus is on you to validate any damages incurred. Any potential losses that surpass the amount you've declared are risks that you, as the shipper, will need to bear. It's essential to accurately determine and state this value to ensure optimal protection and clarity in the shipping process.

It's essential to accurately declare the item's value, as under or over declaring can lead to complications if a claim needs to be made later. Once the insurance is purchased, the package is protected up to the declared amount against loss, theft, or damage during transit. Be careful though, as porch theft doesn’t always qualify as an insurable event, given that the package was technically delivered to the customer’s door.

When it comes to setting the declared or insured value for a shipment, it's essential to understand the basis upon which this value is determined. Contrary to what some might believe, it's not the retail price or the amount the customer paid that's taken into account. Instead, the reimbursable amount is based on the replacement value of the item. This refers to the cost that would be incurred to replace the item in its current condition, without any added profit margin. Essentially, it's the raw cost of obtaining or producing a similar item again. This approach ensures that the declared value reflects the true cost to the business, rather than inflated retail prices or discounted sale values. When insuring shipments, it's crucial for shippers to accurately assess and declare this replacement value to ensure adequate coverage and avoid potential complications during the claims process.

3PLs and other technology providers can program automated rules that determine when to purchase insurance based on specific order profile details. For instance, a rule might be set to automatically insure shipments containing items over a certain value or those being shipped to particular high-risk destinations. Conversely, low-value shipments or those within a local radius might be set to bypass insurance. This automation not only streamlines the shipping process and reduces unnecessary expenses, but also ensures consistent decision-making, eliminating the variability and potential oversight of manual evaluations. By integrating such automated systems, businesses can achieve a balance between protecting their shipments and optimizing costs, all while ensuring a seamless and efficient shipping process.

Shipping Insurance: The Cost of Peace of Mind

The cost of shipping insurance varies based on the carrier and the value of the items being shipped. Here's a quick breakdown of insurance costs for the three major US carriers:

USPS Shipping Insurance Costs

Here are the common rates for USPS Ground Advantage & Priority Mail

• Up to $100.00: $0.00 (free)

• $100.01 to $200.00: $4.55

• $200.01 to $300.00: $5.95

• $300.01 to $400.00: $7.50

• $400.01 to $500.00: $9.05

• $500.01 to $600.00: $12.15

• $600.01 to $5,000.00: $12.15 plus $1.85 per $100.00 or fraction thereof. Max coverage is $5,000.

More information on USPS shipping insurance.

FedEx Shipping Insurance Costs

FedEx charges for shipping insurance a little differently:

• Up to $100: $0.00 (free)

• $100.01 – $300.00: $3.90

• Every additional $100 value over $300: $1.30

More information on FedEx shipping insurance

UPS Shipping Insurance Costs

And, of course, UPS shipping insurance deviates a bit from FedEx and USPS.

• Up to $100: $0

• Every additional $100 value over $100: $2.10

A slightly more affordable and creative insurance solution Rush Order has good experience with is UPS Capital. As of this writing, this insurance coverage is cheaper than the values listed above for all three carriers. Also, as of this writing, UPS Capital’s coverage extends to ALL carriers and all shipments, not just those sent via UPS. It’s worth a look if you are serious about insuring lots of your shipments.

Feel free to download the above information via this quick one page shipping insurance guide.

To Insure or Not to Insure? Think Twice.

While the advice in plenty of articles around the internet leans towards the importance of buying shipping insurance, Rush Order gives its clients the opposite advice.

While carriers often tout the benefits of their shipping insurance, a deeper dive reveals that it might not be the financial safeguard it's made out to be. First and foremost, the cost of insuring every package can quickly add up (see fees listed above), especially for businesses that ship in reasonably high volumes. When you crunch the numbers, the fees paid often outweigh the potential losses, particularly given the relatively low incidence of lost or damaged shipments. Even our own article discussing FedEx vs UPS vs USPS points to a 95% or better on time delivery rate. And, of the 5% of shipments that miss their target transit time, most of those are just slow, not damaged or lost.

But it's not just about the costs. Another real challenge arises when you need to make a claim. Carriers are notorious for their stringent and often convoluted claims processes. Shippers find themselves navigating a maze of paperwork, providing endless evidence, and often waiting for extended periods only to face potential claim denials. The effort required to get a claim processed and approved can be so taxing that many wonder if the initial insurance purchase was worth the hassle.

Dana Madlem, Rush Order's VP of Services, couldn't have put it better: "While shipping insurance might seem like a safety net, the reality is that it's often an expensive illusion. The true costs aren't just in premiums but also in the time and effort wasted in the claims process."

Before opting for that insurance checkbox, shippers should weigh the real costs and potential pitfalls.

The Financial Impact of Shipping Insurance

Let's crunch some numbers. If an e-commerce business ships 1000 packages a month, with an average replacement value of $200 each, and chooses to insure every package with FedEx, they'd spend an additional $3,900 per month on insurance alone. Over a year, that's $46,800. Now, considering the actual frequency of lost or damaged shipments, is the cost justified? Maybe the coverage will help you sleep better, but we find most clients do not opt in to this expense.

Parting Thoughts on Shipping Insurance

Shipping carrier insurance can be a safety net for businesses and individuals alike. However, it's essential to evaluate the actual risks, costs, and potential benefits. While insurance can offer peace of mind, it's crucial to determine if it's a wise financial decision for your specific needs.

Every shipment is a representation of your brand. Whether you choose to insure or not, always prioritize delivering a seamless and positive experience to your customers. To speak with a shipping insurance expert, we invite you to schedule a free consultation with Rush Order. Again, the consultation is free and there’s no obligation.

Shipping Insurance Frequently Asked Questions (FAQs)

1. What is shipping insurance?

Shipping insurance is a service that protects shippers against potential losses from lost, stolen, or damaged packages during transit.

2. How is the declared or insured value of a shipment determined?

The declared value is based on the replacement value of the item, not its retail price or the amount the customer paid.

3. Is it always financially wise to purchase shipping insurance?

Not always. It's essential to weigh the actual risks, potential costs, and the challenges of the claims process before deciding.

4. What challenges might I face when making a claim?

Carriers often have stringent and convoluted claims processes, requiring extensive evidence and paperwork, which can be time-consuming and sometimes result in claim denials.

5. How do 3PLs help in making insurance decisions?

3PLs can automate the decision-making process by setting rules based on specific order profiles, eliminating the manual evaluation of whether to insure a shipment.

6. Why is the replacement value used instead of the retail value?

The replacement value reflects the true cost to the business to replace the item in its current condition, without added profit margins or discounts.

7. How often do shipments face issues like loss or damage?

While the exact frequency varies by carrier and route, lost or damaged shipments are relatively rare, but when they do occur, the financial and reputational implications can be significant.

8. Can I insure any item, regardless of its value?

While most items can be insured, carriers often have maximum liability limits. It's essential to check with your carrier for specific restrictions or limitations.

9. What role does the declared value play in the claims process?

The declared value represents the maximum amount a carrier is liable for. In case of a claim, shippers need to validate damages up to this declared amount.

10. Are there alternatives to carrier-provided shipping insurance?

Yes, there are third-party insurance providers that offer shipping insurance, often at competitive rates and with more straightforward claims processes compared to traditional carriers. Check out UPS Capital as one example.

Remember, it's always a good practice to consult directly with your shipping provider or a logistics expert for specific queries and up-to-date information. To chat with a shipping insurance expert, we invite you to schedule a free consultation. Again, the consultation is free and there’s no obligation.