5 Things Every Mail Order Business Should Know about Shipping Insurance

Posted on August 5, 2009. Filed under: Amazon, eBay, Tips & Hints - Website Sales, Tips - for the eBay Seller | Tags: , , , , , , , |

In life, we face the possibility of a large loss if we own a car or a home or other valuable property.  Sometimes we don’t want to take the risk that we can “lose it all” so we purchase insurance where we “lose just a little” in the form of insurance premiums in order to protect ourselves from total loss.  It works the same way in the mail order business.  Any online merchant that ships packages to their buyers is faced with the possibility that the package will not be delivered to the recipient in the intended condition.  And shippers can decide to transfer the risk of total loss to an insurance provider in return for a small fee.  Deciding when to insure a package is not always easy.

1. Don’t view each transaction in isolation.

As an ecommerce merchant you cannot expect that all your packages will arrive perfectly every time.  It just isn’t realistic.  So, you need to think about how many times a loss occurs in your business and how big the loss is each time.  If you ship 100 packages a month and expect a $20 profit from each package then you would expect a total of $2000 at the end of the month.  But assume one package is not delivered as intended and you experience a $200 loss.  Instead of $2000 for the month you earned $1800 for the month, or $18 per each package shipped.  Past history is an important factor here, when looking at your business in the aggregate.  Assume you experience a loss about 24 times a year, or about twice a month.  In the above example, each package shipped would then earn an average of $16 profit.  If that is an acceptable profit level for your business then the losses are affordable for you and purchasing insurance from a third party provider may not be necessary for you.  But if you could purchase insurance on all 100 packages for less than $4 a package (the average loss per package) then you might want to consider purchasing insurance.

2. When insuring packages against loss and damage with a third party, there is a cost to you that is more than just the amount of the premiums.

If you pay for insurance for each and every package you ship then there is an easily identifiable cost that you pay to a third party provider for the cost of insurance.  But when a customer contacts you because a package was not delivered or was delivered damaged then there is a cost for you to deal with that issue.  If you “self-insure” then you can deal with the issue internally and the time to manage the “claim” is significantly less than if you have to file a claim with someone else.  With an insurance company, you have to fill out insurance forms, provide copies of documents, and submit the completed paperwork and then wait.  And most of the time you have to involve the customer in the process and get a statement from them and/or ask them to make the package available to the carrier for pickup or even to take the package themselves to the post office, if postal insurance was purchased.  There is time involved in communicating and coordinating with the customer to process a claim when an insurance company is involved.  All of the related costs associated with filing insurance claims may not be as easily identifiable as the cost of the insurance you pay but there are real costs to your company that are above and beyond the insurance premiums you pay. 

3. The “law of averages” is important but always insure a package that you could not afford to replace or refund.

If your past history shows that 99.99% of the time your packages arrive intact then you may decide that, as a general rule, you don’t need to purchase insurance on the packages you ship.  But you should also have an established policy whereby you place an upper limit on the amount of risk you are willing to take per package.  If your average package is valued at $200 then you might decide to insure any package where the value exceeds $400, for example.  If losing $400 would really hurt your business for the month then you should insure that individual package even though, as a general rule, you don’t pay for insurance on packages you ship.  Establish a “tolerance level” dollar amount, the amount of loss your company could take without materially affecting your operations.  Making those insurance decisions in advance prevents having to make decisions “on the fly” about each and every package. 

4. Define each of the risks and assess the risks according to your business model.

Most mail order companies face two significant risks: (a) the package gets lost in transit or (b) the package arrives damaged.

In assessing each of the risks for your company, it is absolutely imperative that you evaluate the risks while considering all the relevant factors.  For example, it is not simply enough to have the item delivered to the recipient.  You must be able to prove delivery was made and the type of proof needed depends on what form of payment the buyer used.  For example, a business who sells a $25 item on eBay where the buyer paid with PayPal will only need to supply proof in the form of delivery confirmation.  But if the buyer paid for the eBay item with a merchant credit card, the seller would likely need to supply proof in the form of signature confirmation for this very same transaction.  Understanding the requirements for proof of delivery based on the payment method is critical in determing the extent of the risk for nondelivery. 

Of course, different types of items shipped would have different risks when considering whether an item has a high likelihood of arriving damaged.  Obviously a set of dishes would be more risky to ship than a set of handkerchiefs.

There are a number of relevant factors that must be considered when assessing risk and those factors would vary from business to business.  The time of the year may be a factor for some businesses who sell mostly during the holiday season as they will likely experience a much higher percentage of risky transactions during that time of year.  And a business who ships to international customers will surely face more risk than a mail order company that only ships domestically. 

5. Understand the insurance coverage you buy BEFORE you need to file a claim.

When you pay for insurance, you want to make sure you understand all the details of what is required of you to meet the eligibility to be covered in the event of loss or damage.  For example, if you ship a package via FedEx Ground to a residence and FedEx leaves the package on the doorstep but you do not request in advance and pay for signature then you are not covered by Fedex insurance if the recipient claims the package was not delivered.  (Refer back to point #4, though, because if your buyer purchased an eBay item and paid with PayPal, you would not face a financial loss because you would have enough proof for delivery in the event of a Paypal dispute.  However, there is a very real risk that your customer would be very unhappy and would leave unfavorable ratings for you.)  Be sure to read all the fine print about insurance coverage because it is a really disappointing feeling to discover after the fact that you didn’t take the necessary steps to qualify for coverage after you paid for the insurance.

In conclusion, all online sellers ultimately bear the risk of failing to deliver the package to the recipient in the condition stated.  Ecommerce merchants can do everything right in preparing the item(s) for transit but we must rely on the carrier to do their part, too.   And when the shipping carriers fail the mission, it is the seller who is ultimately responsible to the buyer.  It is just one of the risks a seller takes.  And the cost of that risk should be considered in the seller’s pricing model, both in determing the price of the product as well as the price of the shipping and handling charge. 

Any seller can choose to purchase insurance but third party venues, such as Amazon, Bonanzle, or eBay, do not require sellers to purchase shipping insurance.  Online buyers are not given the choice to purchase insurance because they bear none of the risk in the actual shipping of the item.  Insurance is to mitigate risk and because the seller is the one facing the possibility of loss, the final decision about whether or not to purchase insurance from a third party is a decision that must be made by the seller.

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One Response to “5 Things Every Mail Order Business Should Know about Shipping Insurance”

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You forgot one VERY IMPORTANT point.

In order to QUALIFY for insurance reimbursement you almost ALWAYS have to have the cooperation of the buyer. If you are dealing with a fraudulent buyer, they almost certainly will NOT cooperate, which means you will probably be out ALL the money, regardless of whether you purchased insurance or not, especially if you sell on eBay or the buyer claims “damage”.

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