In this article, AdvisorSmith examines the implications of insurance for business owners who may have experienced water damage to their business from frozen pipes that burst. Our analysis highlights the types of business insurance that cover these damages, and the claims that may arise from these risks. We also answer some of the common questions that business owners may have regarding damage and losses from frozen pipes.
Does business insurance cover property damage or losses from frozen pipes?
Many, but not all commercial property insurance policies provide coverage for water damage caused by frozen pipes that burst open. The cost to hire a plumber to repair or replace broken pipes is usually not covered by insurance.
In order to receive coverage, business owners must have a policy that covers water damage, and business owners must do their best to maintain heat in their building. If the cause of frozen pipes that burst is a power outage, coverage will generally be applicable.
Additionally, if a business has business income insurance (also commonly known as business interruption insurance), losses to business income due to water damage from frozen pipes that burst will also be covered.
For small business owners, many businesses are covered by business owner’s policies (BOP) which bundle together liability, property, and business income coverage into a single policy. If the BOP includes coverage for water damage, then the business may receive coverage for frozen pipes that burst.
Commercial Property Coverage for Frozen Pipes
Commercial property insurance is an optional insurance coverage that businesses can buy to protect their place of business and business-owned property. Many, but not all commercial property policies cover water damage, including water damage from frozen pipes that burst.
Policies that include coverage for water damage include policies that are sometimes called “all-risk,” “open perils,” or “special causes of loss” policies. Additionally, policies with “named perils” that specifically cover water damage will also provide coverage.
Notably, policies with “basic causes of loss” or “basic form” coverage generally do not include coverage for water damage, so business owners with this type of coverage generally would not be covered in the event of a burst pipe.
Additionally, business owners have an obligation to do their best to maintain heat in their business building in order to receive coverage for water damage. If pipes freeze due to a power outage that is not in the control of the business owner, coverage generally will apply.
Coverage will apply to business property damaged by water from a burst pipe, such as damage to the structure, walls, floors, furniture, fixtures, equipment, and inventory. However, the cost to hire a plumber to repair or replace the broken pipe is usually not covered by insurance.
Example:
- Freezing temperatures in Texas lead to emergency rolling electricity blackouts. A local art gallery’s pipes freeze and crack as a result of the cold temperatures and the inability to heat the building. When power is restored, the pipes begin leaking, flooding the store and destroying artwork. The store carries commercial property insurance, which pays for the cost to replace the artwork and other furniture and fixtures in the store.
Losses under a commercial property policy are subject to the coverage limits under the policy. When a business purchases a commercial property policy, they inform the insurance company about the dollar value of the property that they wish to protect. If the value of the business’s property exceeds the coverage limit, the amount that the business can recover from insurance may be reduced.
Losses for commercial property policies are usually subject to a deductible, which means that the business is responsible for a portion of the loss. Deductibles vary by industry, but common deductibles for small businesses for commercial property insurance may range from $1,000 to $10,000.
Does business insurance cover loss of business income due to frozen pipes?
Business income insurance, also known as business interruption insurance, can cover a business for the loss of income if a frozen pipe bursts and causes water damage that impedes the ability of a business from operating as usual. Businesses that purchase this optional coverage can be reimbursed for income losses due to water damage that renders their business inoperable. If a business has coverage under their commercial property policy and they purchase a business income policy, they will generally also have coverage for loss of income.
Business income insurance will compensate a business for lost profits a business would have earned in the absence of the water damage. It also pays for continuing operating expenses of a business such as rent, employee salaries, and utilities that a business may need to pay until the business location can be restored and reopened.
Example:
- A bakery has a frozen pipe that bursts open. The bakery is full of specialized equipment, such as industrial baking ovens and mixers, which are all destroyed. In order to reopen, the bakery needs to replace the specialized equipment, which will take at least six weeks. During this downtime, business income insurance will pay the bakery for its lost profits and employee salaries.
Business income coverages almost always have a waiting period of 24-72 hours, which serves as a “time deductible.” During the first 24-72 hours after water damage from a burst pipe, insurance will not cover any losses in income during this time period. Once the 24-72 hour period has expired, then losses will begin to be covered.
Most business income insurance policies also include coverage for extra expenses. These are expenses that a business pays to reopen the business more quickly and can include expenses such as repairs, moving costs, additional rent, or equipment purchases for a temporary or alternate location.
Do business owner’s policies (BOP) cover frozen pipes?
Business owner’s policies, which combine liability insurance with property insurance and optional business interruption insurance, may cover water damage from frozen pipes that ultimately burst. Similar to the business insurance coverage described above, coverage will only be provided if the policyholder does their best to maintain heat in the building, and the policy covers water damage as a named risk, or if the policy covers risks of direct physical loss unless otherwise excluded.
If my business experienced water damage from frozen pipes, what should I do?
If your business has experienced water damage from frozen pipes that subsequently burst and you have insurance coverage that covers this scenario, you should take the following steps to facilitate your insurance claim.
- Shut off your main water valve. Turn off electricity to the area with water. Contact a plumber.
- Call your insurance agent, broker, or insurance company to inform them that a loss has occurred. The agent or insurance company will provide you with paperwork and forms you’ll need to complete in order to initiate your claim.
- When it is safe to do so, take reasonable steps to prevent further damage to property, such as using mops, towels, and a wet/dry vacuum to absorb water.
- Take photographs and written notes on damage that has occurred and property that has been damaged. Provide records to the insurance company about the value of equipment, fixtures, inventory, furniture, and building improvements, in addition to sales and payroll records so your insurer can determine the value of the loss.
- Keep detailed records of any temporary or emergency expenses you incur to restart operations, such as renting a temporary space, costs to remove debris, or buying temporary equipment.