Does Your Business Need Flood Insurance?

Flood Insurance Can Be Beneficial Even If You're Not In a Flood Zone

Hurricane Sandy Flood Closes Businesses at Annapolis Harbor
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Does your business have $90,000 on hand to repair flood-damaged property? That's the size of the average commercial flood claim, according to FEMA. Flood claims are substantial because water-damaged property is costly to clean up and repair. This is especially true if the property is contaminated with mold. In the absence of flood insurance, your business will have to pay these costs out of pocket.

May Be Mandatory or Optional

Flood is an excluded peril under virtually all commercial property policies. Fortunately, most business owners that wish to insure their flood risks can obtain a policy through the National Flood Insurance Program (NFIP).

For most businesses, flood insurance is optional. Business owners can evaluate their flood risks and then buy insurance if they choose. However, flood insurance is mandatory if a business owns property that is situated in a flood zone and is mortgaged through a lender that is insured or regulated by the federal government.

Things To Consider

Even if your building has no mortgage, you should seriously consider flood insurance if your property is located in a high hazard area (Flood Zone V or A). If your property is situated in Zone V ( a coastal area) it has a high risk of damage from both flooding and storm surge. Properties in Zone A (near bodies of water) have a high risk of damage from flood but not storm surge.

Suppose your business property is located in a moderate or low-risk zone (Zone X on newer maps and Zone B or C on older maps). Should you buy flood insurance? Here are some things to consider before making a decision.

First, your business will not receive any disaster assistance from FEMA if your property is damaged and not insured. FEMA provides disaster assistance to households only (not businesses).

Secondly, flood risks are evolving rapidly due to climate change and other factors. Flood maps are revised infrequently. Thus, the published map of your area may not reflect your actual flood risks. The fact that the current map doesn't designate your area a flood zone doesn't mean a flood won't occur. FEMA reports that over 20 percent of the claims filed under the NFIP involve properties located outside high-risk areas.

Thirdly, flood insurance premiums are usually low for properties located outside high-risk zones. If you buy a flood policy and your area is later designated a flood zone, your future premiums will be calculated based on your previous zone.

A "grandfathering" rule allows you to retain your previous zone for rating purposes if you had flood insurance when your area was remapped and you continue to maintain coverage.

If you allow your coverage to lapse and buy coverage later, you will be charged a rate based on the current zone. If you have maintained your flood insurance both before and after the zone change and then sell your property, the "grandfathered" zone rating will pass to the buyer.

Cost

The price you pay for a flood policy depends on a number of factors. Here are some of them:

  • The date your building was constructed. You may be eligible for subsidized rates if your building was constructed before the first flood map for your area went into effect. However, subsidized rates are being phased out.
  • The building's occupancy (how it is used)
  • The number of floors in your building
  • The building's location (zone designation)
  • Whether your community is eligible for a premium discount
  • The location of the lowest floor relative to the base flood elevation (meaning the elevation to which floodwater is expected to rise during a flood)
  • The location of your personal property (whether it is above or below the base flood elevation)
  • The deductible and limits you choose
  • Whether you are eligible for a grandfathered zone

Flood Insurance Policy

Three different policy forms are used to provide flood insurance under the NFIP. The General Property Form can be used to insure most businesses other than residential condominium associations. The Residential Condominium Building Association Form is used to cover buildings and personal property owned by a condominium association. The Dwelling Form is used to insure homeowners, residential renters and condominium unit-owners, and owners of residential buildings containing two to four units.

Most businesses can be insured under the General Property Form. The policy covers damage to your building and its contents caused by flood, including mudflow. Only one building may be insured under a policy. If you own multiple buildings, each must be insured under a separate policy.

The General Property Form covers direct damage only. It does not cover a loss of income or extra expenses that result from flood damage. FEMA provides details about the coverages afforded by the NFIP flood in this coverage summary.

A unique coverage provided by the General Property Form is Increased Cost of Compliance (ICC). This coverage may apply if your community has declared your building "substantially damaged" or a "repetitive loss" structure and it requires you to bring the building up to the current flood code. ICC coverage provides up to $30,000 to elevate, demolish or relocate your building or to flood-proof it by installing a qualified basement.

The maximum limits you can buy under the NFIP are $500,000 on your building and $500,000 on your personal property. If your business needs higher limits you can purchase excess insurance from insurers that offer private flood coverage. Alternatively, you can buy a Difference in Conditions (DIC) policy.