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If your business is located in a high-risk flood area, you may likely need the protection of Commercial Flood Insurance. Provided by the National Flood Insurance Program and backed by the federal government, Commercial Flood Insurance provides financial protection if your business property suffers flood damage.
What is Commercial Flood Insurance?
Commercial Flood Insurance protects your business from the financial costs of flood damage. While property insurance policies provide coverage for your property in the event of an accident or natural disaster, flood damage is commonly excluded from these policies.
Flood insurance is only available through the National Flood Insurance Program (NFIP), which is managed by the Federal Emergency Management Agency (FEMA). This program provides government-backed Commercial Flood Insurance coverage in two forms: building property coverage up to $500,000 and personal property (i.e., the contents of a building) coverage up to $500,000. The NFIP recommends that you purchase both types of coverage.
To purchase Commercial Flood Insurance, you’ll need to contact an insurer who offers NFIP insurance. You cannot purchase flood insurance directly from the NFIP, FEMA, or the federal government. If you need higher limits of coverage, excess flood coverage is available from some private insurers. Flood insurance policies can also provide business income coverage for floods.
What is the definition of a flood?
A simple definition of a flood is an accumulation of water on normally dry land. The NFIP has a technical definition of a flood, which is as follows:
A general and temporary condition of partial or complete inundation of two or more acres of normally dry land area or of two or more properties (at least one of which is your property) from any of the following:
- Overflow of inland or tidal waters
- Unusual and rapid accumulation or runoff of surface waters from any source
- Mudflow, which is defined as “A river of liquid and flowing mud on the surfaces of normally dry land areas, as when earth is carried by a current of water. Other earth movements such as landslide, slope failure, or a saturated soil mass moving by liquidity down a slope, are not mudflows.”
- Collapse or subsidence of land along the shore of a lake or similar body of water as a result of erosion or undermining caused by waves or currents of water exceeding anticipated cyclical levels that result in a flood as defined above
What does Commercial Flood Insurance cover?
The NFIP provides two main types of Commercial Flood Insurance coverage: buildings and contents. It also provides other additional coverages such as the increased cost of compliance, as well as prevention, protection, and cleanup.
Commercial Flood Insurance from the NFIP provides up to $500,000 in coverage for direct physical damage to buildings from or by flooding. This includes damage to floors, walls, ceilings, plumbing, electrical systems, and HVAC. For businesses that rent their buildings, this coverage can provide for tenant improvements your business has made to the building you rent.
Buildings that are eligible for Commercial Flood Insurance include:
- Non-residential buildings
- Residential buildings with 5 or more family units
- Residential condo buildings with at least 25% non-residential occupancy
The NFIP also covers the contents of your building up to $500,000. Contents coverage includes furniture, fixtures, inventory, machinery, equipment, and other property owned by your business that has been damaged by a flood. The limit for contents coverage is separate from the limit for buildings coverage, so in total, a policy issued under the NFIP will pay up to $500,000 for damage to the building and up to an additional $500,000 for damage to your business property.
Increased Cost of Compliance
When a covered building suffers substantial damage, the NFIP also provides up to $30,000 in Increased Cost of Compliance (ICC) coverage.
Cities and communities usually update their building standards over time in order to reduce damage from floods. If your building was built before the current standards took effect, you may incur additional costs to rebuild or bring your building up to the current flood management standards.
ICC coverage reimburses you for the cost to elevate, demolish, or relocate a damaged building. It also reimburses the cost to floodproof qualified basements in buildings. ICC claims are handled in addition to the amount of your building claim. However, the total of the ICC and building claim together cannot exceed the maximum building coverage of $500,000.
Prevention, Protection, and Cleanup
Flood insurance also covers the costs of prevention, protection, and cleanup.
The most common and effective form of flood protection before a storm is sandbagging. The NFIP will pay up to $1,000 to reimburse the cost of placing sandbags to protect your property. In addition, Commercial Flood Insurance will also pay up to $1,000 to reimburse the cost of moving items out of danger in advance of a storm.
After a storm, Flood Insurance will pay for the cost of removing debris from your property.
In addition to the coverage provided by the NFIP, excess flood coverage is available from insurers on the private market. If you need higher limits of coverage beyond the NFIP limits, you can purchase excess coverage from a private insurer. Excess coverage can also provide business income insurance for flood. This can compensate your business for lost profits, as well as wages and operating expenses while your business is unable to operate.
What are the key exclusions to Commercial Flood Insurance?
There are a number of common exclusions included in Commercial Flood Insurance:
- Damage caused by moisture, mildew, or mold that could have been avoided by the property owner
- Damage caused by sewer or drain backup unless caused the backup was caused by flood
- Currency, precious metals, or valuable papers such as stock certificates
- Property outside of your building, such as landscaping and septic systems
- Business vehicles, which can be covered by a separate commercial auto insurance policy
- Losses caused by business interruption, which can be covered by a business interruption policy or through excess coverage
Who is required to purchase Commercial Flood Insurance?
With the increase in severe storms, hurricanes, and extreme weather around the globe, flooding is becoming a growing threat for many businesses. Recent studies have shown the average commercial flood claim approaching $100,000, making it more important than ever for businesses, large and small, to obtain Commercial Flood Insurance.
Location is the biggest factor that affects the risk of flood damage. FEMA provides a flood zone map where you can check the risk of flood for your property.
The NFIP generally categorizes flood risk into two broad categories: moderate- to low-risk flood zones and high-risk flood zones. Your business is required to purchase Commercial Flood Insurance if your commercial property is located in a high-risk area and you have a mortgage from a federally regulated or insured lender. For moderate- to low-risk areas, the risk of flood is reduced but not eliminated. The NFIP reports that one-third of all annual flood claims come from areas in moderate- to low-risk flood zones.
Common Causes of Flooding
Floods can have a variety of causes, and floods can occur even in areas that don’t typically flood. Some of the common causes of flood include:
- Storm surges after hurricanes
- Heavy rain causing flash-flooding
- Overflowing rivers or streams
- Broken dams or levees
- Mudslides due to heavy rain on hills or mountainsides
- Fast melting snow, which can cause floods when the ground is frozen and unable to absorb water
- Blocked storm drains, which may cause a flood even with moderate rainfall
- New urban development which changes natural runoff patterns and reduces the ability of the land to drain properly
How much does Commercial Flood Insurance cost?
Commercial Flood Insurance premiums can range from a few hundred dollars a year to thousands of dollars annually. Premiums are based on a variety of factors, including:
- Location of property and associated level of flood zone risk
- Building’s age, height, and occupancy
- Your company’s location within the building, as a company located on a higher floor may see lower premiums
- The location of the lowest floor of your building in relation to the elevation requirement on the flood map
- Deductible, as the higher the deductible, the lower your premium
- The amount of coverage
If your building is located in a moderate- to low-risk flood zone, you may be eligible for a Preferred Risk Policy (PRP), which offers buildings and content coverage at low cost, often just a few hundred dollars annually.
It’s important to note that NFIP policies have a 30-day waiting period, which means the policy does not go into effect until 30 days after you purchase it. This means you cannot wait until right before you know a storm is coming to try to purchase Flood Insurance.
How is flood damage assessed?
Commercial Flood Insurance from the NFIP provides coverage on an actual cash value (ACV) basis. Actual cash value is the cost to repair or replace the property minus a charge for depreciation. The depreciation charge is based on the age and condition of the property. Replacement cost (RC) coverage is not available from the NFIP for Commercial Flood Insurance.
If your business is located in an area at risk for flooding, making sure you have the proper insurance coverage is paramount. Experts predict that global weather patterns will continue to vacillate toward extremes, meaning more severe hurricanes and storms and a higher chance for flooding, even in areas that historically have had lower risks. Commercial Flood Insurance is available through a variety of insurers and backed by the federal government, and this critical coverage can provide your business with the financial support to weather the serious damage that a flood can inflict on your business property.