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What you should know about flood insurance

Rain Drops Keep Fallin’ on My Head is not just hit song from 1969, but a reality that many across the nation have had to come to grips with in a year full of extreme weather events. A number of the more notable weather patterns that we have seen thus far in 2011 have brought about strong winds and heavy rains. Of particular concern following any harsh storm is the potential for an ensuing flood loss.

Flooding can be expensive and can wreak havoc in a number of different ways including that of extensive remediation and restoration costs, the potential for mold growth and the disruption of business operations leading to lost revenues. According to FloodSmart.gov, the average commercial flood claim over the past five years has totaled over $85,000.

Water Damage vs. Flood Damage

In the aftermath of any storm, it important to be aware of the distinction between “water damage” vs. “flood damage,” as the coverage thought to have been purchased may not respond quite as expected. While the definition of “flood” often varies by policy, it is typically described as a condition in which normally dry land is impacted by an excess of rising or overflowing water. Water damage, on the other hand, is not caused by rising waters, but rather by water that has penetrated a building’s structure before hitting the ground or from a water source within the structure itself (i.e. pipe leak/burst).

Flood Insurance

While dependent on the flood zone designation of any given area, a number of standard commercial property policies either specifically exclude coverage for flooding or are subject to high deductibles – in large part due to the unpredictable nature of weather changes and the potential for catastrophic losses.

Although many insurers may be resistant to offering flood coverage, businesses and homeowners alike do not have to look much further than the federal government for assistance. In the late 1960s, the government implemented a program to provide subsidized flood insurance. The National Flood Insurance Act of 1968 established The National Flood Insurance Program, or more commonly known as “NFIP.” NFIP is administered by the Federal Insurance Administrator (“FIA”), a department of the Federal Emergency Management Agency (“FEMA”). More than 90% of NFIP policies are written through a program known as “Write Your Own,” which allows consumers to buy flood insurance directly through participating private insurance companies. In turn, the private insurers often outsource the actual claim handling to third-party administrators.

National Flood Insurance Program

Regardless of which insurer underwrites the NFIP coverage, FEMA mandates the premium rates and the policy’s terms & conditions, thus creating uniformity among all of the participating insurers. As long as a business or residence is located within a participating NFIP community, a flood policy can be purchased. The following are a few highlights (specific to commercial properties) of which can be found in an NFIP policy:

  • Non-residential risks are subject to a $500k limit per building structure & $500k limit for contents coverage; subject to separate deductibles
  • NFIP owes Actual Cash Value (ACV): Replacement Cash Value (RCV) less physical depreciation
  • Outdoor property is excluded, with the exception of a small $1k sublimit for loss avoidance measures (i.e. sandbags & pumps); not subject to a deductible
  • NFIP specifically excludes indirect loss such as business interruption
  • A Proof of Loss must be submitted within 60 days of the loss date

As this winter quickly approaches, it is important to plan ahead as NFIP mandates a 30 day waiting period from the date of the policy’s inception date before the coverage goes into effect. For a list of the exceptions to the waiting period or for additional information about NFIP coverage, please visit FEMA or Flood Smart or contact your Client Executive at William Gallagher Associates.

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William Gallagher Associates is a leading provider of insurance brokerage, risk management and employee benefits services to firms with complex risks and dynamic needs, within industries that include technology, life sciences, financial risks, health care, renewable energy & clean technology, and environmental services. WGA has offices in Boston, MA; New York, NY; Hartford, CT; Princeton, NJ; Columbia, MD; and Atlanta, GA.

  1. Harris Mack
    November 21, 2011 at 6:03 pm

    This is a really informative piece–exactly the information I needed. Thank you for posting.

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