Shipping Insurance for Ecommerce: When It's Worth It

A seller in one of my ecommerce groups posted last month that UPS lost a pallet of handmade ceramics worth $4,200. No insurance. UPS offered $100 — their maximum liability for uninsured ground shipments.

"I thought insurance was a scam," he wrote. "I just saved myself $4,100 in education."

That's a dramatic example. But most shipping insurance decisions aren't about $4,200 pallets. They're about the everyday question: does it make financial sense to insure a $45 package that has a 1.5% chance of being lost or damaged?

The answer, like most things in shipping, is "it depends." But I can give you the exact math to figure it out.

What Shipping Insurance Actually Covers

Shipping insurance reimburses you (the shipper) or the recipient when a package is:

• Lost: Carrier can't locate it after a specified period (usually 7-21 days depending on carrier)
• Damaged: Contents arrive broken, crushed, or water-damaged
• Stolen (sometimes): Package marked delivered but never received — coverage varies by provider

What it typically does NOT cover:

• Inherent product defects
• Inadequate packaging (they'll deny your claim if the box was wrong for the item)
• Prohibited items
• Perishables that expire during normal transit
• Delayed delivery (insurance doesn't cover late packages, just lost/damaged ones)

Carrier-Included Insurance

Every major carrier includes some baseline coverage:

That $100 of included coverage on USPS Priority Mail is actually worth something — it's not nothing. If your average order value is under $100, you already have baseline protection on Priority Mail shipments.

But there are catches. USPS claims are notoriously slow (30-60 days) and they deny at a higher rate than third-party insurers. UPS and FedEx process claims faster but have strict packaging requirements that they'll use to deny claims if your packaging wasn't "adequate."

Third-Party Shipping Insurance

Third-party insurance is usually cheaper and easier to claim against than carrier insurance.

Route has an interesting model: the customer pays for insurance at checkout. You add a Route widget to your checkout, the customer opts in (or out) of $0.98-2.00 protection, and Route handles the entire claim process. You pay nothing. The customer gets peace of mind. Route takes the risk.

About 55-65% of customers opt in to Route when it's presented as a checkout option. That's free risk mitigation for you as the seller.

The Self-Insurance Math

Here's the question smart sellers ask: should I just self-insure?

Self-insurance means not buying any insurance and instead setting aside a reserve to cover losses yourself. The math is straightforward:

If your loss/damage rate × average claim value < insurance cost per package, self-insurance wins.

Industry Average Loss and Damage Rates

These are industry averages. Your actual rate depends on what you ship (fragile items have higher damage rates), where you ship (certain regions have higher theft), and your packaging quality.

Self-Insurance Calculation

Example: Store shipping 500 packages/month, average order value $65

Now compare to third-party insurance:

In this example, buying insurance saves $382.50/month. Insurance wins.

But change the numbers:

Same store, but loss rate is only 0.5% (better carrier, better packaging)

Basically a wash. At very low loss rates, insurance barely saves anything — and you might prefer self-insurance to avoid the hassle of filing claims.

When Insurance Is Absolutely Worth It

Don't overthink it for these categories:

High-Value Items ($200+)

If you sell products over $200, insure every package. Period. One uninsured loss wipes out the insurance premium for hundreds of orders.

If more than 1 in 200 packages gets lost or damaged (very likely), insurance pays for itself.

Fragile Items

Ceramics, glass, electronics, artwork — anything that breaks. Damage rates for fragile categories run 2-5%, sometimes higher. Even with excellent packaging, the math favors insurance heavily.

Holiday Season (November-January)

Loss and damage rates spike 30-50% during peak season. More packages in the system means more sorting errors, more theft, more delivery mistakes. Even if you self-insure the rest of the year, insure during peak.

International Shipments

International packages pass through more hands, more scans, more customs inspections. Loss rates for international shipments are 2-4x domestic rates. Insurance is almost always worth it for cross-border shipments.

When Self-Insurance Makes More Sense

Low-Value Items (Under $25)

If your average order is $15 and a lost package costs you $20 total (product + reshipping), insurance at $0.08-0.15 per package costs you $40-75/month on 500 packages. Self-insuring at a 1.5% loss rate costs $150/month. Insurance is technically cheaper, but the claims process on a $15 item is a headache that costs you employee time worth more than the payout.

Many small-item sellers just reship without filing claims. It's faster, the customer is happier, and the cost is minimal.

Very Low Loss Rates

If your carriers consistently lose/damage less than 0.3% of packages (often achievable with UPS/FedEx for non-fragile items), self-insurance is almost always cheaper than paying premiums.

Large Volume With Negotiated Carrier Agreements

At 5,000+ packages per month, you can negotiate declared value pricing with UPS/FedEx that's lower than third-party insurance. Some high-volume shippers get declared value coverage at $0.20-0.30 per $100 — below third-party rates.

How to File Claims Efficiently

Filing a claim shouldn't take 30 minutes per package. Here's how to set up a system:

Documentation to Collect at Packing

Photo of product before packing

Photo of product in box, showing packaging materials

Photo of sealed box with label

Weight recorded (matches what carrier was told)

If you do this for every shipment, claims become trivial. Most denials happen because the shipper can't prove proper packaging or contents.

Claim Filing Timeline

Track Your Loss Rate

Keep a spreadsheet. Every month, record:

• Total packages shipped
• Number of claims filed
• Number of claims approved
• Total claim payouts
• Total insurance premiums paid

After 6 months of data, you'll know exactly whether insurance is a good deal for your specific business. No more guessing.

My Recommendation

For most ecommerce sellers shipping 100-2,000 packages per month with an average order value between $30-150:

Use Route at checkout — let customers pay for their own insurance. It's free to you and covers most claims.

Self-insure orders under $50 — just reship if something goes wrong. The goodwill is worth more than the claim payout.

Buy third-party insurance for orders over $100 — Shipsurance or InsureShip, $0.40-0.55 per $100.

Insure everything during November and December — peak season loss rates make the premiums worth it regardless of order value.

Track your actual loss rate for 6 months — then optimize based on real data, not assumptions.

That ceramics seller? He insures everything now. His annual insurance cost is about $2,400. One loss would have cost him $4,200. Sometimes the boring financial decision is the right one.