Water can cause some of the most extensive damage to commercial buildings. Knowing this, many business owners would like coverage in the event that their building is damaged by water. However, business owners would be surprised to learn that most commercial policies do not provide coverage for water/sewer backup or for traditional flooding. Sometimes these coverages can be provided by endorsement to the commercial property policy, while other times a separate policy will need to be purchased to provide coverage.
To begin, it’s important to define the terms and understand the difference between the two causes of loss:
Water/Sewer Backup: This is when water or water-borne material back up into a property from sewers, drains, and sump pumps or similar equipment.
Flooding: This is when water enters a building through windows, doors, or cracks in the foundation of your building. Overflowing bodies of water caused by melting snow or heavy rainfall tend to be the largest contributor to a flood problem.
Water/Sewer backup coverage is the most widely available coverage for water. It can usually be added via an endorsement to your commercial property policy. Limits available tend to be low and can range from $5,000 to $250,000, depending on your insurance company. Often, a separate deductible may apply for cases of water/sewer backup. It’s important to understand if your policy has been endorsed or not, and if it has been; to what limits and at what deductible.
Flood insurance it a little more complex. It too, is not included in a basic commercial property policy. Availability of flood coverage depends on many factors including, but not limited to: insurance company, location of the property insured, and property values to be insured.
Insurance Company: Depending on your insurance company’s risk profile and tolerance level, they may or may not offer flood coverage. Some smaller insurance companies may not have the desire or financial backing to be able to provide flood coverage.
Location of the Property Insured: There are 18 different flood zones as defined by FEMA. The flood zones are determined by the percent chance of that specific area experiencing a flood. While some companies may offer flood coverage in a Zone X (unshaded) (low risk of flood), the same company may not offer flood insurance in a Zone A. (high risk of flood)
Property Values to be Insured: The same principle applies here – as the property limits to be covered by flood insurance increase, the availability of flood insurance decreases.
All three of these factors work together to determine the flood coverage that will be available to a commercial property. A $10M dollar property in a flood zone A, insured by a small insurance company will not have the same availability of flood coverage as a $5M dollar property in a flood zone X (unshaded) insured by a large insurance company. Depending on the specific circumstances surrounding a specific commercial property, flood coverage may not be available for full limits. The property may have to have flood coverage on a sublimit basis – that is, if the building should be insured for $10M dollars, the property may only be able to be insured for flood coverage up to $1M dollars. Often substantially higher deductibles will apply to flood coverage compared to the standard deductible provided on the policy.
If a property is determined to be too risky for traditional flood coverage provided by an insurance company, there is the National Flood Insurance Program (NFIP) that is available to business owners. Coverage is provided on a significantly sublimited basis through the program. Coverage may also be provided through the National Catastrophe Insurance Program (NCIP), which generally can provide higher limits and broader terms of coverage than the NFIP program can provide.
Business owners should review their commercial property policies to determine the extent to which they are protected against water damage. If unsure, feel free to contact us for a free review of your current commercial property insurance for water/sewer backup coverage, flood coverage, flood zone determination, and corresponding flood risk level.
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