McNees Wallace & Nurick LLC: Flood Insurance - More Businesses Should Consider Purchasing This Coverage

McNees Wallace & Nurick LLC: Flood Insurance - More Businesses Should Consider Purchasing This Coverage

[Originally published 11/08/2011]

By Charles T. Young, Jr.

The East Coast recently suffered unprecedented flooding problems as a result of Hurricane Lee, and these problems have created new interest in the availability and coverage provided by flood insurance.

Congress created the National Flood Insurance Program ("NFIP") to provide affordable flood insurance to individuals and small businesses and to encourage preventive and protective measures. Under the NFIP, flood insurance is provided at or below actuarial rates. Private insurers administer the policies under the supervision of the Federal Emergency Management Agency ("FEMA"), and the U.S. Treasury pays for claims to the extent that they exceed the premiums collected from policy holders.

Flood insurance is issued as a separate policy, and it is not a part of property and casualty, commercial general liability, or homeowners' policies.

Flood insurance applies and provides coverage when there is a "flood," meaning a partial or complete inundation of two or more acres of normally dry land or of two or more properties resulting from (1) an overflow of inland or tidal waters, (2) rapid accumulation or runoff of surface waters, (3) mudflow, or (4) collapse or subsidence of land along the shore. 

Property insurance and homeowners' policies will typically cover some types of water damage, such as damages resulting from a thunderstorm, sprinklers discharging during a fire, or other water damage related to a covered event. These policies may also include endorsements affording coverage for things like sewer back-up and overflow. However, property and homeowners' policies exclude coverage for flooding, and they frequently bar coverage if flooding, in combination with some other covered event (like wind), contributes to a loss. 

Importantly, flood insurance is available for properties located both inside and outside of flood zones, and it has two components - coverage for the building property (i.e., structure), and personal property (i.e., contents). A business can purchase up to $500,000 of coverage for the building property and $500,000 for personal property. An individual is generally limited to $250,000 of building property coverage and $100,000 of personal property coverage. Building property coverage includes things like the building, its foundation, the electrical and plumbing systems, central air conditioning, furnaces, and water heaters. Personal property coverage would include items like furniture, food freezers, clothing, and electrical equipment. 

Flood insurance has important limitations and qualifications. Notably, it only covers direct physical losses. It does not cover loss of revenue or profits, loss of access to the property, loss from interruption of business or production, or other economic losses. Additionally, flood insurance generally pays only the "actual cash value" of business property, meaning that it will likely not cover the full cost of repairing or replacing damaged items. Finally, flood insurance covers only a limited number of items located in a basement or in areas below the lowest elevated floor of properties prone to flooding. 

If you do have a flood claim, it is important to act quickly. Flood insurance policies require that a formal claim (or "proof of loss") be submitted within 60 days of the flood, and the policies bar payment of untimely claims. Notably, a proof of loss cannot be prepared overnight. It must include a variety of detailed information, such as specifications of the damaged building, repair estimates, and an inventory of damaged personal property. Moreover, in the event of a dispute, a policy holder must generally file any lawsuit within a shortened period of time. The standard flood insurance policy requires that any contract claim be brought within one year of the written claim denial. 

Despite the restrictions and requirements, flood insurance provides important protection to policy holders. Floods can result in catastrophic losses for a business or individual. Yet, few people purchase this coverage, and flood insurance is often viewed as either too expensive or unnecessary, or both. Certainly, flood insurance can become expensive for properties situated in flood zones, but it is also frequently very affordable for properties without an extensive history of losses. Moreover, the losses resulting from Hurricane Lee show that floods are not just a problem for people living in recognized flood zones. Flooding affects many different properties, and a business may not be able to predict whether or where it will suffer a flood loss.

IT's YOUR BUSINESS is presented with the understanding that the publisher does not render specific legal, accounting or other professional service to the reader. Due to the rapidly changing nature of the law, information contained in this publication may become outdated. Anyone using this material must always research original sources of authority and update this information to ensure accuracy and applicability to specific legal matters. In no event will the authors, the reviewers or the publisher be liable for any damage, whether direct, indirect or consequential, claimed to result from the use of this material.

© 2011 McNees Wallace & Nurick LLC


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