Should Business Owners Buy Business Flood Insurance?

I’m publishing this post the week after the remnants of Hurricane Ida dumped tremendous amounts of rain across the Northeast and particularly around the New York Metro area.   It sparked many to ask about business flood insurance.

The deluge set records and flooded areas in New York, New Jersey, Connecticut, and Pennsylvania that hadn’t seen catastrophic flooding in the past.  This storm took a lot of people by surprise and is probably a precursor to a future with more storms and abnormal flooding due to extreme weather patterns. 

For many business owners, it begs the question of whether they should purchase flood insurance, which is why I did this video.

Let’s start with the basics. 

Flood is a peril that is excluded from all business owners’ policies and commercial property policies, especially in the small business market.  In fact, many insurers post in big bold letters early in their policies “that this policy does not cover flood” as a reminder of the flood exclusion.  

The exclusion of the peril of flood is nothing new – it’s not been covered on a business policy for as long as I can remember.  

Now, in some large commercial property policies sub-limits for a flood can be included but typically have large deductibles and we’re talking about policies with premiums in the $100,000 plus range. 

What is a flood for insurance purposes?  

Simply put the peril of flood is the inundation of property which is normally dry land from overflowing inland waters such as creeks, streams, rivers, or lakes, or the unusual and rapid accumulation of runoff of surface waters from any source or mudflows. 

What we saw in Ida’s wake was all of the above.  Rivers and streams flooded and in some areas, drainage pipes that normally dump into those rivers and streams backed up into roadways, highways, and other areas.   

Rain fell so quickly that it had nowhere to go and inundated areas that normally don’t see flooding.  This led to the ground floor and basement areas of small and large buildings being flooded damaging buildings, contents, and building equipment systems. 

Why is flood excluded from most business policies? 

Flood is excluded from business policies for the same reason that it’s excluded from homeowner’s insurance policies.   

First, because the cost of automatically including flood coverage would make these policies prohibitively expensive for most business insurance buyers.   

Second, the widespread damages that floods create could bankrupt any insurance company.  In insurance language, there is an insufficient spread of risk to protect insurance company balance sheets.   

This is why almost all flood insurance is reinsured by the federal government through the National Flood Insurance Plan. 

Why don’t most businesses carry flood insurance? 

Most businesses who are not in a flood zone or who haven’t carried flood insurance in the past, likely don’t insure against the peril of flood.   

Why? 

I think because it’s an added expense that most businesses feel is unnecessary.  Flood coverage can be expensive and if they’re not forced to carry flood insurance by their bank or lender, a business owner probably thinks the risk is manageable. 

But, this thought process may change with last week’s flooding and anticipating more crazy weather patterns in the future. 

Do you need Flood Insurance? 

That’s a good question, that only you the business owner can really answer.  It should be based on some data and not a gut reaction based on “well, I’ve never had a problem in the past”.  As we saw this past week, a lot of areas that haven’t flooded in the past were destroyed by Hurricane Ida.   

What factors go into this decision-making process?  I would be thinking or asking:  

• What is your proximity to potential sources of flooding?   
• What flood zone are you in?   
• What’s the premium for flood insurance?   

And then decide whether flood insurance is a good investment or not. 

Risk Control Measures  

Like a lot of risks, preparation is a key to flood risk mitigation.  It may be impossible to entirely mitigate the risk of flood, but steps can be taken to reduce the chances you do get flooded or reduce the impact on your business if a flood strikes. 

Here is a link to a flood preparation checklist you can download to help get you started on better understanding flood risk.

So, if you do purchase flood insurance, what’s covered by a business flood policy? 

Flood insurance can be purchased through your agent or broker from The National Flood Insurance Plan, or from private insurers who act as servicing companies for NFIP – the actual risk of flood is borne by The National Flood Plan. 

The NFIP has certain maximum limits of coverage.  For commercial buildings, the max flood limit is $500,000 and for business personal property it’s $500,000 as well.  Depending on your circumstances there are options to increasing this coverage via excess flood policies placed with commercial insurers. 

There are a lot of coverage restrictions that I don’t want to go into here but be aware that not everything is covered – especially in basements and crawlspaces.  You can find a lot of this info on the NFIP website, or we can help you with some of these issues. 

Here’s the bottom line. 

Flood is a peril that’s excluded from small commercial property policies.   

It has the capacity to create a catastrophic loss.  While it is insurable, it can be expensive and limiting, which is why many businesses don’t carry flood coverage.  But, with changing weather patterns and the potential for extreme weather now upon us and in our near future, it makes sense to reevaluate flood insurance. 

Lastly, whether you purchase flood insurance or not, you should have a plan to mitigate this risk and be prepared for potential flooding situations to protect property.  As I mentioned earlier there’s a checklist below to help you with that process. 

Thanks for watching this video or reading this post, my name is Gordon Coyle and if you’re looking for help on business insurance have a business insurance question, give me a call, let’s chat.  No pressure, no sales gimmicks just some conversation to see if I can help you and if we might be a good fit for your business insurance needs.  To get started, click the button below.

Thanks!