Commercial Flood Insurance: Yes, You Should Have It Here

Far too often, business owners learn the true risk of flooding and the value of Flood Insurance the hard way: by experiencing a loss. Call it “Can’t Happen Here Syndrome.”

Most business owners understand that damage caused by flood — typically from water overflow, water spray or mud flow – is not covered under a standard Commercial Property policy or Business Owners Policy (BOP). In most cases, coverage must be added through separate policies or, in some cases, a policy endorsement.

Federal law requires that buildings located within a designated Special Hazard Flood Area (SHFA) be covered by Flood Insurance, but even some businesses in SHFA zones — and many more outside them — forgo flood coverage, considering it an unnecessary added expense.

Here’s the scenario: A business owner’s commercial property doesn’t have a history of flooding. No body of water is in sight. So, the owner figures, “Why pay for Flood Insurance? Can’t happen here.”

Until it does.

According to the Federal Emergency Management Administration (FEMA), which administers the National Flood Insurance Program (NFIP), about 25% of all Flood Insurance claims come from areas rated as low to moderate risk of flooding. A few more salient bits of information from FEMA:

  • The average commercial flood claim is $90,000.
  • Just one inch of water can cause damage of up to $25,000.
  • 90% of all natural disasters involve some type of flooding.

Natural disasters in recent years have become almost commonplace — a major reason behind the ongoing hard market for Property and Casualty Insurance in general and Commercial Property Insurance in particular. Nine of the top 10 years for extreme one-day precipitation events in the U.S. have occurred since 1990, according to the Environmental Protection Agency (EPA), and 2020 alone saw a record 22 weather events that cost at least $1 billion in damage, according to the National Oceanographic and Atmospheric Administration (NOAA).

Even under FEMA’s new Risk Rating 2.0 — a system designed to make Flood Insurance rates more equitable and eliminate reliance on outdated flood maps — assessments of flood risk may be based on data that doesn’t convey the increasing number of catastrophic precipitation events.

The 2014 National Climate Assessment cited increases in heavy downpours of 71% in the Northeast, 37% in the Upper Midwest and 27% in the Southeast from 1958 to 2012, but such statistics only hint at the severe rainfall to come, a climate change expert who served in the Obama administration recently told the Washington Post.

“So if you’re building a house to last for 30 years, or a piece of infrastructure to last for 50 to 100 years, you’re basing it on out-of-date data from the get-go,” said the former White House official, Alice Hill. “And that’s doomed to failure because these events are accelerating.”

Commercial Flood Insurance Basics 

For small and midsize businesses, there are two basic forms of coverage through the NFIP:

  • Commercial Contents — covers equipment, fixtures, furnishings, inventory, machinery, merchandise and tools up to $500,000;
  • Commercial Building — covers the building structure up to $500,000.

Outside the NFIP, private Flood Insurance may be an option for those seeking lower premiums and/or higher limits.

Commercial tenants, if their business is located on a lower floor of their building, should consider purchasing at least Commercial Contents coverage. Building owners should purchase both Commercial Contents and Commercial Building coverage. If you’re a tenant who has made significant improvements to the building, you may want to purchase both coverages as well.

Currently, premiums for commercial Flood insurance range from as little as $500 annually to thousands of dollars per year, based on factors such as:

  • The insured building’s elevation and proximity to a natural source of water
  • Date of construction
  • Number of floors
  • Location of property within the insured building
  • Deductible and limits
  • Whether the building is eligible for a grandfathered rate.

‘Flood Insurance is Priceless’ 

Dan Roland, general manager of Loess Hills Harley-Davidson in Pacific Junction, Iowa, is a staunch Flood Insurance advocate. In March 2019, after a winter of heavy snow, rapid melting contributed to the collapse of a levy on the Missouri River, forcing Roland and his team to evacuate.

Flood waters peaked at about 18 inches inside the dealership. When Roland returned to the building, he found some parts and clothing floating, others covered in mud. But with the help of his staff, members of the community and its insurers, the dealership was able to recover.

“I think I’m more grateful for having insurance that kept us alive, kept us going. Otherwise, we’d be driving by a vacant building, saying, ‘That used to be our livelihood,’ Roland says in a FEMA video.

“Without the Flood Insurance, if this business wasn’t here, we’d lose 25 jobs, and that would domino-effect into the families. It’s your employees’ future that’s on the line. It’s your own future that’s on the line. You don’t want that disrupted in any way. The greatest success is the Flood Insurance that kept us alive. Flood Insurance is priceless, in my opinion.”

Managing the Risk of Flood Loss 

Start by working with an experienced insurance professional who understands your business and industry. An agent or broker who doesn’t at least discuss Flood Insurance with you, explaining the risks and available coverages, is not someone you should entrust with protecting your business.

A knowledgeable agent or broker also will tell you what Flood Insurance will NOT cover, such as:

  • Loss of revenue
  • Business interruption
  • Loss of use of or access to the insured building
  • Property located outside the insured building
  • Additional expenses incurred while the building is unoccupiable uninhabitable due to damage or ongoing repairs.

Coverage is available for those potential losses. A knowledgeable agent or broker will work with you to close coverage gaps and manage the cost of risk.

Here are five tips for mitigating the risks and costs of flooding:

  1. Purchase Flood Insurance. Keep in mind the risk and potential costs of flooding. If you believe your premium is too high based on incorrect property classification, consider hiring an engineer to evaluate the property. An engineer who determines the insured property is above base flood elevation can issue a Letter of Map Amendment (LOMA) to appeal the classification. Before hiring an engineer, however, do a cost-benefit analysis to determine whether the potential savings on your coverage is greater than the engineer’s fee.
  2. Record inventory. Include photos and video for use in the event of a claim.
  3. Keep important documents and digital storage devices in waterproof containers. As the Internal Revenue Service (IRS) notes, “Reconstructing records after a disaster may be essential for tax purposes, getting federal assistance or insurance reimbursement. After a disaster, taxpayers might need certain records to prove their loss. The more accurately the loss is estimated, the more loan and grant money there may be available.” The IRS provides a disaster resource guide, Publication 2194, to help businesses and individuals prove loss of personal-use and business property.
  4. Know the claim-filing process. FEMA provides a guide: How to File a Flood Insurance Claim.
  5. Consult your insurers before repairing damage. Your agent should be able to answer questions about what services your policy covers and recommend a reputable restoration company.

Of course, flooding isn’t the only growing risk business owners have to be concerned with. Join Alera Group for an April 28 webinar to learn how to build a cyber-security strategy that will help you protect your business from a manmade risk that’s greater than ever.
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About the Author

Alan Woznicki
Risk Consultant
Lighthouse Group, an Alera Group Company

Alan Woznicki has more than 30 years’ experience in providing businesses with risk management and Property and Casualty Insurance solutions. He specializes in the healthcare, public entity, nonprofit and manufacturing industries, assisting clients by analyzing their operations and placing comprehensive risk management programs to ensure organizations, their employees and their customers are properly protected.

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