Insuring Your Packages
One of the first three steps when creating a business (aside from figuring out your product or service and filing for a business license) is insuring your business. Usually, e-commerce stores forget the simple act of providing insurance for their customer's order packages. When a package is lost, stolen, or damaged, the item's liability falls on the business.
Although standard business insurance is based on liability, it usually covers liability in terms of being sued, employee accidents, or even broken machinery. Rarely will insurance cover your delivery parcels, meaning those have to be dealt with on a package by package basis.
Based on the carriers you use, there will be a section called "declared value." Each carrier has a different definition of the declared value, but it is essentially what your company says an item or package is worth. If you are shipping multiple items inside a box, you need to calculate that into declared value. If an item is lost or damaged due to the carrier, i.e., it happened because of a carrier mistake, then you can file a claim with the carrier for the value of the items—the value of the items being what you paid for them.
It is wise to file a claim with the carrier based on every broken, damaged, or undelivered package at your company's discretion. Regardless of the requested claim's standing, it is still the company's responsibility to resend the item(s) to the customer. If you are selling high-margin items, we encourage you to add in the cost of insuring each package into the consumer's cost. The addition of this cost would be a hidden fee they do not see, but your company can rely on that additional revenue to pay for the added insurance every time that item is purchased. All major carriers have free coverage up to a certain amount of your company's declared value. Remember, this is the entire package that is insured if your items add up to a declared value. Anything that is more than the free coverage stated by each carrier will be an additional cost for your company.
Carriers and shipping insurance providers have a limit on insurance maximums varying based on service. You can buy shipping insurance directly from each carrier or contact a third party to purchase shipping insurance. Remember, it is on a package to package basis and, in the end, falls on the online store to file claims and resend undelivered items to the customer.
Should you purchase shipping insurance?
Understanding what you are shipping is crucial. If you send an order such as furniture that needs to ship in multiple boxes, if one item is damaged in the process, the customer cannot correctly assemble the order. An issue like this increases company risk. When orders are split into multiple packages, it is more likely that at least one product piece will be damaged in transit. Additionally, think about items that are more likely to be stolen. High-end brands and more expensive products are more likely to have packages stolen. Help prevent this by choosing to keep packaging un-branded, requiring a signature for delivery, or paying for parcel insurance.
Think about the number of stops your parcel takes to get to a destination. For example, is it worth it to insure a package that is only traveling within the state? Studies show it is less likely to get lost or damaged when it has a shorter distance to travel. This means it is usually in your company's best interest to insure international shipments since they have a higher likelihood of getting lost or damaged in transit. You can add in the price to insure the package to the shipping price. Once again, it would be a hidden cost to your customer, but your company will never see the extra cost added to revenue.
How to Calculate Insurance
A good rule of thumb for insuring packages is to use a cost analysis equation.
Number of shipments lost/damaged/stolen
--------------------------------------- X average declared value = cost to replace the item
Total number of shipments
If that number above is less than the average insurance cost per item/parcel, you should purchase insurance to mitigate the risk.
You sell handbags. On average, the order value is $300, and you are shipping about 100 bags per month, but two always get lost, stolen, or damaged.
2/100 X 300= 6
If it costs less than $6 on average to insure each package, then you should buy the insurance. If it costs more than $6 on average to purchase insurance for each order, you are essentially wasting money and getting no value out of the insurance. Sometimes you have to know when to cut your losses.
How to Insure Packages
Congratulations, you have weighed all of the risks and costs associated with insuring your packages, and you've decided to move forward with insuring your shipments, but how? There are multiple ways that you can insure your packages. You can specifically work with the carriers you use to insure each package. You can hire a specific company to insure your packages as well. There are companies dedicated to parcel specific insurance. We, unfortunately, cannot determine how much it will cost for you to insure your parcels. Rates are determined on a package to package basis determined by declared value and warehouse location to your customer's door.