Floods are a major threat to businesses everywhere – not just on the coastlines. However, commercial property coverage typically excludes flood losses. For most companies, disaster preparedness planning is incomplete without flood insurance.
The Rising Flood Risk for Businesses
The U.S. Environmental Protection Agency (EPA) reports that floods are occurring more frequently due to rising sea levels. Tidal flooding is expected to increase in depth, frequency, and extent in the U.S. this century.
However, even if your business is not located near the coast, you may have substantial and growing flood risks due to changing weather patterns. According to the National Resources Defense Council (NRDC), flooding may take the form of coastal flooding, river flooding, flash floods, and urban flooding. The number of flood-prone areas around the country is expected to increase by half this century.
The floods that occurred in North Carolina during Hurricane Helene are a stark reminder of the danger. The North Carolina Office of State Budget and Management estimates that Hurricane Helene caused more than $13 billion in economic losses from reduced business revenue. This is in addition to the immense property damage, which consisted of thousands of structures.
According to FEMA, 99% of counties in the U.S. have experienced a flood since 1998. If it rains where you are, there’s the potential for a flood.
Businesses that have gone without flood insurance in the past may want to seriously reconsider this approach in light of rising risks.
The Importance of Having a Business Flood Insurance Policy
Standard property insurance does not cover flood losses. This is true of both personal and commercial property coverage. Unfortunately, many policyholders do not know this and think their property insurance policy will cover flood damages. Then, when they suffer a loss, they are surprised by the claim denial.
According to Chubb, 85% of companies incorrectly believe that their property insurance covers flooding. Plus, only a minority of businesses understand that flooding is both the most common and the costliest natural disaster. In other words, most businesses are unprepared.
How Flood Insurance for Businesses Works
When purchasing commercial flood insurance, you have two main choices: coverage through the National Flood Insurance Program (NFIP) or private flood insurance.
Commercial NFIP insurance provides up to $500,000 in coverage for commercial buildings and up to $500,000 in coverage for commercial personal property.
-
Coverage for the building includes the building and foundation as well as building equipment and systems, permanently-attached fixtures and surfaces, furniture, machinery and equipment, certain other personal items, and stock.
-
Coverage for commercial personal property includes furniture and fixtures, machinery and equipment, certain other personal property, stock, portable items, clothes washers and dryers, food freezers and the food in them, original artwork and certain other high-value items, and non-licensed self-propelled vehicles stored in the building. There is also limited coverage for building improvements that the policyholder made as a tenant. See your policy for a complete list of what it covers.
NFIP policies do not cover business interruption. For this reason, and since the $500,000 limits and actual cash value coverage may be insufficient for many businesses, some businesses opt for private flood insurance, which provides more flexible coverage and higher limits. It is also possible to secure business interruption coverage for floods and to buy private excess flood insurance that supplements NFIP coverage to provide higher limits and additional coverage.
Note that NFIP insurance also excludes sewer backup coverage. This is often available through commercial property insurance as an add-on.
The Financial Impact of Flooding Without Commercial Flood Coverage
Imagine there are two competing factories in the same inland town. Factory A has NFIP coverage as well as a private excess flood policy with higher limits and business interruption coverage. Factory B has no coverage.
A massive storm causes flooding, leading the entire town to be evacuated for three days. Both factories are severely damaged and require repairs before they can resume work.
-
Factory A files a claim for business interruption and relies on its flood insurance to pay for the repairs. The storm is hard on the company, leading it to lose some clients. A year later, though, operations are back to normal and it is regaining customers.
-
Factory B barely has enough reserves to cover the building repairs and lost equipment and inventory. When it loses clients due to the disruption, it cannot continue and goes out of business.
Flood Risk Assessments for Businesses
Flood insurance typically has a 30-day waiting period. By the time a storm is approaching, it will be too late to purchase coverage. Act now.
-
Assess your flood risk. Even if you’re inland, you are probably at risk. Plus, your risks may be increasing due to changing weather. Check flood maps and predictive models.
-
Assess potential losses from a flood. Include building and contents damage as well as business interruption.
-
Determine what resources you have available to cover losses. If you do not have enough in reserves, consider flood insurance.
A flood can be devastating. Between the loss of income and the property damage, many businesses are unable to survive. Flood insurance provides protection, especially when your business secures a private flood insurance policy with business interruption coverage.
Need guidance? Watkins will help you assess your flood and other insurance needs so that you are prepared for the risk of flood and other disasters.
