Securing holiday operations: A merchant's guide to shipping insurance

With over 268 million people shopping online in the U.S. alone in 2022, e-commerce has become an integral part of the American consumer experience. Unfortunately, this surge in online shopping has also led to a significant increase in porch piracy, with nearly 50 million Americans falling victim to package theft in the last 12 months, resulting in 260 million stolen packages. The estimated annual loss to package theft is a staggering $19.5 billion.

Naturally, there is major consumer demand for insurance products that give consumers peace of mind in the event their merchandise doesn't arrive. In response, there has been an explosion of online "package protection offerings".

Here's why this is happening: In e-commerce, there typically is a liability gap between the time of delivery and the time the consumer retrieves the package. Consumers turn to shipping insurance to fill this coverage gap — and merchants gladly offer it as an add-on at checkout.

Some third-party package protection apps are marketed as 'tech solutions' in an attempt to circumvent state insurance regulation. Digital distribution of insurance offerings doesn't negate the need for the involvement of a licensed insurance provider. Consumers and merchants can see if their package protection providers are authorized by visiting the National Association of Insurance Commissioners Licensee Lookup online. It's a great way to understand who is legitimate. If the status indicates the provider as 'Active' they are authorized, and if it does not, the offering is likely illegal. 

As an attorney with three decades of insurance regulatory experience, I'm calling attention to the challenges and risks presented by these unauthorized insurance offerings in the retail space — for the sake of merchants, and their consumers. As the holiday season approaches, it is crucial for merchants to address the rising concerns associated with "fake shipping insurance" and unlicensed "package protection" providers. 

Avoiding unlicensed 3rd-party offerings
The term "insurance" is generally defined as one party paying another party consideration in exchange for the assumption of risk the assuming party would not otherwise have — risk for acts beyond their control. Like all forms of insurance, shipping insurance is subject to strict state regulation. Fake insurance offerings, often labeled as "warranties" or "shipping guaranties" fail to meet the legal requirements for making a legitimate insurance offering, including the required involvement of a licensed insurance producer, the issuance of an actual insurance policy or risk transfer.

While some merchants partner with authorized insurance providers to make shipping insurance available to their customers, many instead utilize unlicensed shipping protection apps that fail to include the involvement of licensed providers, posing risks to themselves and consumers. Further complicating this illegal landscape, other merchants implement their own "DIY" models offering coverage — again without the benefit of licensed insurance providers or actual insurance policies. The pervasive use of unauthorized insurance offerings has become a lucrative but concerning trend, negatively impacting both consumers and merchants. App developers and shopping platforms profit from unregulated offerings, leaving consumers at risk of purchasing non-existent insurance coverage.

Oklahoma is setting the tone
Recently, the Oklahoma Insurance Department (OID) issued an alert highlighting the prevalence of "fake shipping insurance" and unlicensed "package protection" providers illegally claiming to offer coverage for stolen items. The guidance issued by the OID is based on the same model licensing provisions and other regulatory requirements enacted by all states — making it vital for merchants to understand that this issue extends beyond state borders. There is an anticipation that other states will soon issue similar guidance regarding the need for licensed providers to be involved in package protection offerings.

Given the widespread prevalence of unlicensed shipping insurance sales, it is imperative that all states issue clear guidance that asserts that shipping insurance, regardless of its labeling, is subject to the same licensing and regulatory requirements as other forms of insurance. Such guidance would protect consumers from fraudulent offerings, provide clarity to merchants navigating insurance regulation, and promote a level playing field for licensed shipping insurance providers.

For merchants seeking to offer package protection this holiday season, choosing offerings issued through licensed providers will provide peace of mind. Providers adhering to legal and regulatory frameworks eliminate regulatory and financial risks for both the retail business and its customers. This distinction becomes particularly important during a season when online shopping is at its peak, and the risks of falling victim to scams are higher. Legitimate providers distinguish themselves by offering licensed and legal shipping insurance. Working with legitimate providers also mitigates the risk of litigation, including class action suits, associated with the use of unauthorized providers.

As merchants and consumers navigate the holiday season, making informed decisions about shipping protection options is essential. Commitment to providing a secure and regulated insurance solution becomes a critical factor when selecting trustworthy partners. Whether safeguarding valuable gifts or high-ticket items, opting for licensed package protection offers a reliable safety net.