E-commerce business owners often look for ways to increase their cart size to in turn increase the revenue of their business. Many resort to adding package protection, a form of warranty or guaranty that a package will arrive undamaged. However, many of these package protection products may run afoul of state insurance law.

E-commerce merchant liability typically ends when a package is handed over to a transportation carrier, such as UPS, USPS, or Fed Ex. In turn, the carrier’s liability typically ends upon delivery of the product to the consumer’s residence. However, there has been an increase in “porch pirates,” those who steal delivered products from a consumer’s porch. Theft of a product from a consumer’s porch is an incident considered beyond the carrier’s control, leaving the consumer with the risk. If the package costs less than the consumer’s homeowners insurance, it may not be worth making a claim. E-commerce merchants, therefore, have offered package protection to fill this gap.

However, package may run afoul of insurance regulations. To provide insurance under many state laws, a party must be licensed by the state in which the insurance is provided. Insurance is typically defined as a contractual agreement to assume any risk of loss outside of the consumer’s control, and package protection often meets this definition.

Some companies, such as Route, have stepped in to fill this gap. Route has particularly raised millions of dollars in capital, which allows it to seek licensing to provide licensed insurance services in a number of states.

If you offer package protection, it is worth speaking with one of our e-commerce attorneys to determine if you need to be registered as a licensed provider of insurance under state law.

How Package Protection Works and Why Regulators Care

Package protection products are sold to e-commerce consumers at checkout — typically for a flat fee of a dollar or two — and promise to replace or refund a lost, stolen, or damaged shipment. The merchant collects the fee, and either the merchant self-insures the risk or passes it to a third-party company that handles the claims. From a consumer perspective, it resembles a miniature insurance policy on a single shipment. From a regulatory perspective, it may be exactly that.

Most states define insurance broadly. The standard definition — reflected in model acts adopted by the National Association of Insurance Commissioners (NAIC) — covers any agreement where one party assumes a risk of loss or harm for another party in exchange for a premium or fee. Package protection fits that definition on its face. The merchant or third-party provider is assuming the risk of loss; the consumer is paying a fee; the triggering event (package theft, loss, or damage) is beyond the consumer’s control and constitutes an insurable event under standard actuarial classifications.

Which States Are Likely to Scrutinize This Practice

At least a dozen states have insurance regulators that have historically taken an expansive view of what constitutes the “business of insurance.” California, New York, Texas, and Florida — four of the largest e-commerce consumer markets — are among the most aggressive in their enforcement posture. The California Department of Insurance has historically pursued enforcement actions against companies offering products that resemble insurance without a license under California Insurance Code § 1631. New York’s Department of Financial Services has similar authority under N.Y. Insurance Law § 1102, which makes it a Class E felony to conduct the business of insurance without proper authorization.

The exposure is not hypothetical. In recent years, state insurance regulators have scrutinized warranties, service contracts, and protection plans sold by non-insurance entities — including electronics retailers, auto dealers, and pet stores — and required those businesses to restructure their programs, obtain licenses, or partner with licensed insurers. Package protection is the next logical target as regulators turn their attention to e-commerce.

Potential Compliance Structures

E-commerce merchants that want to offer package protection legally have several structural options. The cleanest approach is to partner with a licensed insurance company that issues the underlying policy. The merchant acts as a distribution channel — effectively an insurance agent — and may need to obtain an insurance agent or solicitor license in states where it operates. This is the model that Route and similar companies use. By raising capital and obtaining insurance licenses in multiple states, Route can offer a legally compliant product that a smaller e-commerce merchant could not self-administer.

A second option is to structure the protection as a service contract or extended warranty rather than insurance. Most states have separate statutes governing service contracts, and many of those statutes are less burdensome than insurance licensing requirements. However, service contract statutes typically require that the contract cover defects or mechanical failures — not theft or carrier loss — so the coverage scope would be narrower than a true package protection product.

A third option is for the merchant to absorb the cost of replacements as a customer service policy rather than charging a separate fee. If there is no premium collected, there is no insurance transaction, and the merchant is simply exercising discretion about how to handle customer complaints. The downside is that this approach does not generate the incremental revenue that makes package protection attractive as an upsell in the first place.

What Merchants Should Do Before Their Next Checkout Redesign

• Determine in which states your customers are concentrated and research whether those states treat package protection as insurance under their applicable statutes
• Review the terms of any third-party package protection vendor you are using to confirm they hold proper licenses in each state where coverage is offered
• Evaluate whether the product you are offering can be restructured as a service contract rather than an insurance product
• Consult with an e-commerce attorney and insurance regulatory counsel before launching or continuing a package protection program

The revenue generated by package protection upsells can be significant, but the regulatory and civil liability exposure of offering an unlicensed insurance product is greater. The attorneys at Revision Legal work with e-commerce businesses on compliance and structuring questions exactly like this one. Contact us through the form on this page or call (855) 473-8474.