Commercial Flood Insurance protects your business against the costs of damage caused by flooding. The risk of flood is excluded from most property insurance policies.
Location is the biggest factor that affects the risk of flood damage. The Federal Emergency Management Agency (FEMA) provides a flood zone map where you can check the risk of flood for your property.
Flood insurance is offered by the Federal government through the National Flood Insurance Program (NFIP), for coverage up to $500,000 for Buildings, and $500,000 for Contents. NFIP coverage is usually the cheapest available coverage for flood. NFIP coverage does not include Business Income insurance.
If you need higher limits of coverage, excess flood insurance coverage is available from some private insurers. These policies can also provide business income coverage for flood.
National Flood Insurance Program (NFIP)
Primary flood insurance is provided by the National Flood Insurance Program (NFIP) which is administered by the Federal Emergency Management Agency (FEMA). To purchase flood insurance, contact an agent who offers NFIP insurance. You cannot purchase flood insurance directly from the NFIP, FEMA or the Federal government.
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.
Your business is required to purchase 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.
What is 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, 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.
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.
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.
FEMA maintains a map of flood zones that you can access here.
Your insurance premiums vary based on where your commercial building is located. The NFIP distinguishes between the following levels of risk:
- Moderate to low-risk buildings are rated as Zones B, C, and X. These buildings have a less than 1% annual chance of flooding
- High-risk buildings are rated as Zones A and V.
- Zone A buildings are within a certain floodplain distance from rivers, lakes, or streams.
- Zone V buildings are within a certain distance from the coast and are exposed to natural disasters related to the ocean.
High-risk buildings have higher premiums for flood insurance.
Coverage and Limits of Insurance
The coverage provided by the NFIP provides coverage for buildings and contents. It also provides other coverages such as the increased cost of compliance, as well as prevention, protection, and cleanup.
Flood insurance from the NFIP provides up to $500,000 in coverage for damage to buildings from flooding. This includes damage to floors, walls, ceilings, equipment, and fixtures. For businesses that rent their building, the Buildings coverage can provide coverage for tenant improvements your business has made to the building you rent.
The NFIP also covers Contents up to $500,000. Contents covers furniture, inventory, and other property owned by your business that has been damaged by a flood. The limit for Contents is separate from the limit for Buildings, 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 destruction 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 Buildings claim. However, the total of the ICC and Buildings claim together cannot exceed the maximum Buildings coverage of $500,000.
Prevention, Protection & Cleanup
Flood insurance also covers prevention, protection and cleanup.
The most common and effective form of flood protection before a storm is sandbagging. The NFIP Property coverage will pay up to $1,000 to reimburse the cost of placing sandbags to protect your property. In addition, 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.
The cost to remove or mitigate mold or mildew that forms after a flood is covered. However, mold or mildew that existed prior to a flood is not covered. The policyholder is responsible for taking reasonable precautions to eliminate the formation of mold and mildew.
Actual Cash Value (ACV) Coverage
Flood insurance from the NFIP provides coverage on an Actual Cash Value 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 coverage is not available from the NFIP for commercial flood insurance.
Exclusions from Flood Insurance
Property outside of your building, such as landscaping and septic systems are not covered by flood insurance.
Business vehicles are also excluded from flood insurance. However, you can cover your vehicles for flood by purchasing Comprehensive coverage on your Business Auto Insurance.
Flood insurance from the NFIP also excludes business income or business interruption insurance. This insurance is available on excess coverage from private insurers.
Flood Insurance Pricing
Factors that affect the pricing of flood insurance premiums include:
- Building’s age, height, and occupancy.
- Your company’s location within the building. Companies located on higher floors may have lower premiums.
- Deductible. The higher your deductible, the lower your premium.
Excess Coverage from Private Insurers
In addition to the coverage provided by the NFIP, excess flood insurance coverage is available from insurers on the private market. Since the premiums for flood insurance from the NFIP are usually lower than those from private insurers, it usually makes sense to cover the first $500,000 of your Building and Contents using an NFIP policy. You can then purchase excess coverage from a private insurer if you need a higher limit of insurance.
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.