Many small business owners are under the mistaken impression that their business insurance policies will cover them for damages arising from floods. This is not correct. Just like residential flood insurance, commercial flood coverage must be purchased separately, in a dedicated policy.
The consequences of getting hit by a flood without owning commercial flood insurance are frequently devastating: 40 percent of small businesses hit by a flood never reopen their doors. The results are financially catastrophic to owners and sometimes to employees as well, who find themselves unemployed just as their community is affected by a severe flood.
What does commercial flood insurance cover?
Most flood insurance is sold under the auspices of the National Flood Insurance Program (NFIP), which has a standard set of benefits and exclusions. Commercial customers in low or moderate risk areas can choose building and contents coverage or a contents only policy. Those in higher risk areas naturally pay more, and may not have the option to cover contents-only. NFIP generally provides coverage for the following items:
Building Property Coverage
- Damage to the building and foundation.
- Plumbing and electrical system damage.
- HVAC, water heater and furnace damage.
- Built-in appliances such as dishwashers and refrigerators.
- Permanently-installed carpeting (over unfinished floors)
- Permanently-installed book-cases, cabinets and paneling.
- Window blinds
- Detached garages (for up to 10 percent of total building damage).
Personal Property Coverage
- Carpets not included in building coverage
- Other business property
- Business interruption. If you are out of business for weeks or even months after a natural disaster, business interruption coverage may be able to provide you and your family an income to live on. You may also want enough business interruption coverage to pay salaries of key employees and keep payments on leased equipment current.
- Avoidable mildew and moisture coverage.
- Cash, currency and stock certificates
- Most automobiles.
What’s not covered? Mandatory insurance requirements
If you own a property that is securing a federally-backed mortgage and you live in an at-risk area, you are probably required to carry flood insurance as part of the terms of the loan. Check your mortgage document for specific language.
Is There Variance Between Carriers?
There is no significant difference between insurance carriers when it comes to National Flood Insurance Program policies. All companies simply resell the standard policies, which are the same for all carriers across the board. There is the potential for differences in underwriting, though the underwriting and pricing scheme is designed to be as standardized as possible, too. There are judgment calls that may crop up – for example, how to value that antique piano in the basement. That can make a difference on the margins, but for the most part there’s no benefit to shopping around for basic coverage. You can get the same policy from the agent you’ve been working with for years.
Are you a renter?
If you rent your business space, rather than own it, your landlord may carry a good deal of insurance on the property itself. But he will not typically carry any protection for your property, nor any improvements or alterations you made to the property. You will need to arrange your own separate coverage for that. That’s what the contents-only option is for.
What does it cost?
Premiums for businesses in lower-risk areas start as low as $567 per year for both building and contents, while contents-only coverage starts at $162 per year. Commercial coverage gives you up to $500,000 of insurance to protect your building and up to $500,000 to protect its contents.
Businesses in higher-risk areas will have to pay somewhat more for a standard policy. Premiums will be calculated based on the following factors:
- Age of building
- Building occupancy
- Number of floors
- The location of contents
- Location in or out of a flood plain or other high-risk area
- The location of the lowest floor in relation to the elevation requirement on the flood map (in newer buildings only). Recent data from Hurricanes Katrina, Irene and now Sandy indicate that older lower-elevation guidelines were inadequate to provide protection from hurricane storm surge.
- The deductible you choose and the amount of building and contents coverage
You can estimate your premiums using this online tool from the National Flood Insurance Program.
How to Buy Flood Insurance
You can usually buy flood insurance through your property and casualty or business insurance agent or carrier. Almost all commercial flood insurance happens under the auspices of the National Flood Insurance Program, which is subsidized to an extent by the federal government.
Actuarially speaking, it is a particularly good deal for those in flood plains and other high-risk areas, because the federal guidelines ensure that premiums for these property owners are lower than what insurers would charge without the federal program.
Depending on your circumstances, the insurance carrier may require you to get a certificate of elevation from a surveyor.
While flood insurance is fairly standardized under just a few forms, there are important underwriting considerations that you will need to go over with your agent. For example, items stored in basements need special underwriting and pricing consideration, as does property in excess of the $500,000 cap.
Changing your deductibles can also have a significant effect on your premium.
There is generally a 30 day waiting period before your flood coverage becomes effective. That means you cannot wait until the storm clouds are gathering before purchasing flood coverage. It’s important to act prudently to have coverage in place when the flood event happens.