If you have heard about that devastating water main break in Center City Philadelphia and the damage that it has caused, as a business owner you are probably wondering what if this happens in my neighborhood? Of course, your first instinct would be to assume that your business insurance policy would cover the damage from such an occurrence.
Most business property insurance does NOT cover water damage, and you need to take a look at your business location(s) to determine whether or not this is something that would make sense for you. Even if you’re located in an area with a low flood probability, a policy might be a good idea. There are several things that can cause a flood: fast snowmelt, moderate to heavy rainfall, and even water main breaks. Fill out our contact form or call today (866.667.2737) to get a quote and find out how easy and affordable it is to add flood insurance protection to your portfolio of business coverages.
When is a water main break considered a flood?
The insurance definition of flood is is surface water that covers an area that is normally dry land. If that area is more than 2 acres, or at least 2 contiguous properties are affected including yours, it is considered a flood.
Floods often strike without warning, destroying buildings, equipment, and inventory. Your commercial assets are vital to staying in business, and without commercial flood insurance, you will basically have three choices if a flood disaster hits:
- Pay recovery cost out of pocket (provided you have the cash flow)
- Incur debt to pay for recovery cost (provided you have access to credit)
- Go out of business (sadly, very common)
Here at Financial Blind Spot we say half-jokingly that knowing what your policy does not cover is more important than knowing what it does cover. So you should know that:
- Most commercial policies do not cover flood
- One in four businesses that shut down from a natural disaster never reopens
- 90% of all natural disasters involve flooding
- 20% of flood claims come from outside the traditional flood zones
- One inch of water can cause more then $20,000 in damage
- The most common form of federal disaster assistance in an interest-bearing loan.
Who pays for the damage?
As a rule, unless it can be established that there is a clear case of negligence, public utilities are not considered liable, and damage caused by flooding due to a water main break usually has to be paid for out of pocket. While you could always file a claim with the city to try and recoup some of your expenses, keep in mind that you would have to successfully prove that the city was negligent and didn’t do something that they were supposed to do. To make it clear, if they were repairing a water main and forgot to turn off the water before disconnecting and caused a flood then they may be on the hook; on the other hand if the break is (as we say in the insurance industry) sudden and accidental, you are probably on your own to face the cost of getting back in business.
Basic insurance policies: your typical business insurance policy does not cover water backup nor flood damage. A simple rule of thumb is that damage from water that comes from the ground or under the ground is excluded, while water coming down from above (leaky roof or snowmelt overflows your gutters and destroys your inventory) is generally covered.
What else is not covered?
- Property or equipment outside your building
- Damages caused by earth movement, even if caused by a flood
- Business vehicles (this coverage would be optional on your commercial auto insurance)
There are two types of commercial flood insurance products you can purchase to get coverage for losses due to property damage coming from rising water. They are water backup coverage and flood insurance. Let us look at each one and see what they do.
Water Backup Coverage
Your typical property coverage will not extend to damage caused by water that backs up or overflows from a sewer, drain, or sump. Sewer backup would be an additional coverage on top of your property insurance and it would cover backup of sewers and drains. Because this type of coverage is very specific (it only covers damage from water that backs up into your building) it is relatively inexpensive.
If your property policy includes business income coverage, you can extend that coverage to include sewer backup. This means that your policy will cover income you lose or extra expenses you incur from a shutdown of your business. The shutdown must result from physical damage caused by a sewer backup to property covered by your policy.
Damage from surface water or seepage through a foundation are not covered, though. When a water main breaks, the water bubbles to the surface and floods an area. If you need to get coverage for that you need to buy flood insurance.
Commercial Flood Insurance
As insurance professionals, the typical push back we get from business owners is that they don’t need to purchase flood insurance because they are not in an area that has a flood risk. So they feel like it’s not necessary. A lot of times this coverage is not even brought up as an option. As stated above, many events can cause a flood.
The only way to buy flood insurance is to buy a special flood policy. These policies are provided through the National Flood Insurance Program (NFIP), a federal program administered by FEMA. The rates and coverage are the same no matter who you buy it from and can vary considerably depending upon where your property is located.
When Should I Get This Policy?
We often get multiple calls from business owners looking to purchase a policy once they see on the news that a big weather event is approaching. We then have to let them know that it’s too late to protect themselves against that specific event.
Because there’s a 30-day waiting period on new flood insurance policies, once a flood alert is declared in your area, it’s already too late. So it’s important to buy a commercial flood policy well before a potential flood event is headed your way.
What does a Commercial Flood Insurance Policy Cover?
Commercial building coverage pays up to $500,000 to repair damages to the main structure, and installed improvements. Even if you lease the space, flood insurance might be a good idea, since it allows you to insure the value of any improvements you have made to the space.
On a commercial flood policy, contents coverage extends to inventory, merchandise, machinery, and other contents up to $500,000.
Deductible options go up to $50,000. However,the NFIP does not offer Replacement Cost coverage, so they will deduct for depreciation on both the building and the contents(actual cash value). Also, the deductible applies separately to the building and contents (two deductibles).
The NFIP does NOT offer Business Interruption coverage. If your business is shut down for any period of time after a flood loss, there will be no compensation for your lost business income.
If the value of your business buildings or contents is more than $500,000, you can purchase an excess flood policy to provide total coverage up to $1 million. This is also one of the few ways to add business income coverage to your Commercial Flood insurance policy.
The NFIP also covers your business for flood protection, prevention and cleanup. Sandbagging is the most common and effective way to prevent flood damage to your business, and with your policy, you will get reimbursed for the costs associated with taking part in this defensive measure.
Another important aspect that would be covered in your policy is cleanup. Any work needed to clean and remove debris will be reimbursed under your NFIP coverage.
It’s easy to get a quote. Just fill out our contact form or call us at 866-667-2737. We will be more than happy to answer your questions and assist you in getting the right coverage at the right cost for your business.