A woman sits cross-legged on a living room floor surrounded by taped-up cardboard boxes. She types something on a laptop perched on top of two small boxes. Behind her is a brown leather couch; behind the couch is a set of floor-to-ceiling windows, through which can be seen a yard filled with tall leafy ferns.
Shipping insurance costs can add up, but the cost may be worth it if you're shipping high-value items or if you're mailing goods internationally. — Getty Images/Krongkaew

Ensuring your packages reach their destinations on time and in one piece is essential for customer retention. More than 98% of e-commerce consumers say the delivery experience impacts their brand loyalty. Delayed or lost packages can cause big problems for your brand.

Accidents happen, however; merchants who send packages regularly expect they won’t all be delivered perfectly. Unforeseen circumstances, like natural disasters, labor strikes, or bad weather, can periodically derail the shipping process.

Shipping insurance is one way to lower the risk of missing, delayed, or damaged packages. Here’s how shipping insurance works — and what it will, and will not, cover.

How does shipping insurance work?

There are two main types of shipping insurance:

  1. Carrier-provided insurance, e.g., the insurance coverage provided by logistics providers such as USPS, FedEx, or UPS.
  2. Third-party insurance, e.g., insurance coverage offered by a third party, 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. Third-party shipping insurance may be more comprehensive than carrier-provided insurance but it will cost more.

Shipping insurance costs are calculated 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. However, depending on the product you’re shipping, you may need additional insurance to cover the value of your items.

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. This option also typically offers more flexible terms and conditions than carrier-provided insurance.

To get an estimate of how much a policy could be, the rule of thumb is that the insurance rate is a percentage of the declared value.

What does shipping insurance cover?

As you vet different options, read the fine print of each 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.

So what does shipping insurance cover? “Parcel shipping insurance covers what happens in transit: delivery delays, damage to items, failure to collect payments on delivery, or any other mishandling that’s out of your business’ control,” wrote Pitney Bowes.

Shipping insurance is only effective if you get the right level of coverage. 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 the value exceeding your standard limit.

[Read more: 7 Small and Sneaky Small Business Costs That Add Up]

Is shipping insurance right for your business?

The cost of shipping insurance can vary widely; for instance, USPS’s Priority Mail Express option offers free shipping insurance for up to $100 on all shipments. If the products you’re shipping are valued at less than $100, it may not make sense to purchase additional insurance.

However, if the items you regularly send are high-value, fragile, or irreplaceable, shipping insurance is probably a worthy investment. To get an estimate of how much a policy could be, the rule of thumb is that 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.

[Read more: 10 Ways Your E-Commerce Business Can Save Money on Shipping Costs]

Consider where you will be shipping your products, too. If you serve customers all over the world, it could make sense to get shipping insurance to mitigate the higher risk of an issue happening while in transit. But, if you usually ship within your own region, shipping insurance probably isn’t necessary.

CO— aims to bring you inspiration from leading respected experts. However, before making any business decision, you should consult a professional who can advise you based on your individual situation.

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