How to understand flood insurance and avoid policy pitfalls Featured

8:32pm EDT January 31, 2013
How to understand flood insurance and avoid policy pitfalls

All companies that own, rent or lease a building may need flood insurance, regardless of whether the business is near a body of water or it is a requirement of a lender.

“Even if your business has a low risk of flooding, it’s wise to obtain a quote on flood insurance. Twenty-five percent of all flood claims occur in areas that are considered low to moderate risk,” says Linda Cook, vice president, Personal Insurance Division at ECBM. “Flooding can result from sources such as broken water mains, runoff water, storms, melting snow and other natural causes.”

In the aftermath of Hurricane Sandy, many property owners were unsure of how their flood policies would respond.

Smart Business spoke with Cook about what you need to know about flood insurance, including what is covered and not, to take back control.

What’s the National Flood Insurance Program?

The NFIP was established to provide a means for property owners to financially protect themselves against flooding in participating communities. A participating community agrees to adopt and enforce ordinances that meet or exceed FEMA requirements to reduce the risk of flooding.

Why do you need flood insurance, especially if there’s federal assistance?

Most homeowner and business property policies do not cover flooding conditions or floods. A flood policy can be purchased through your insurance agent or directly through NFIP. All rates are set by FEMA and do not vary from one insurer to another. The premium for a flood policy averages about $700 annually, with maximum limits of $500,000 per nonresidential building and $500,000 for nonresidential contents. The maximum limit under a residential flood policy is $250,000 per building and $100,000 for contents. If higher limits are needed, they may be purchased under an excess flood insurance policy.

As for federal assistance, most forms of assistance are only available after the president declares an area a disaster, and less than 50 percent of all flood incidents are declared official disasters. In addition, most federal disaster assistance to businesses comes in the form of a loan.

How is property-flooding risk assessed?

There are several factors involved in assessing the degree of risk, but a prominent one is the flood zone of a property. This is an area that FEMA has defined according to varying levels of flood risk. An elevation certificate, acquired through a licensed surveyor or engineer, will be able to provide information on the flood zone, the base flood elevation of an area and how a building is elevated. For a favorable flood insurance rate, the building insured should be elevated above the base flood zone.

If you rent commercial space, does that mean you don’t have to do anything?

No. You will need to purchase flood insurance in your business name to provide coverage for your contents. The building owner should have a separate policy to cover the building and whatever contents he or she needs covered.

What else do you need to know when buying or using flood insurance?

A flood policy only provides coverage for direct physical loss by or from flood. Losses are paid on actual cash value (ACV), not replacement cost value. So if, for example, the cost in today’s market to replace your contents is $80,000 but the ACV may be determined to be $50,000, you may only receive the ACV amount, or $50,000.

One particular area where contents coverage is limited is in the area under the lowest elevated floor, which may be a basement, finished or unfinished, as well as an elevated area with lattice or walls. It is important to read your policy.

Some important items that a flood policy does not pay for are:

  • Loss of revenue or profits.

  • Loss of access to the insured property.

  • Loss of use of the insured property or location.

  • Loss from interruption of business or production.

  • Damage caused by mold, moisture or mildew over a period of time.

A list of excluded items is available from a licensed agent or consultant.

Linda Cook is a vice president, Personal Insurance Division at ECBM. Reach her at (610) 668-7100, ext. 1288 or lcook@ecbm.com.

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