Flood insurance and understanding your risk
Following the widespread flood damage left behind after Hurricane Sandy, more businesses are looking to purchase government flood insurance through the National Flood Insurance Program. According to industry experts, many companies rely solely on the commercial market to buy insurance and don’t realize the benefits of participating in the program. Those who do purchase additional NFIP coverage, however, can use it to help reduce large deductibles associated with commercial flood policies.
The NFIP allows non-residential businesses to purchase up to $500,000 in building and $500,000 in contents coverage, while residential businesses can purchase up to $250,000 in building and $100,000 in contents coverage. According to the agency, the average commercial flood claim over the past 5 years has been close to $75,000. Out of the 5.5 million policies it issues, the NFIP advised only 283,000 are non-residential (5.1%). However, given the record flood damage following last month’s storm, that number is likely to rise.
Properties insured by the NFIP are rated according to flood zones, geographic areas that the NFIP and FEMA defines based on varying levels of flood risk. FEMA has placed over 20,000 communities into various zones, which are depicted on a community’s Flood Insurance Rate Map (FIRM) or Flood Hazard Boundary Map. Each zone reflects the severity or type of flooding in the area, which also determines the premium rate for the each community.
Flood Zone Identification
While all properties are assigned to a zone, the real question concerns whether or not a property falls into a dangerous or expensive flood zone. The easiest way to picture this is as concentric circles like the example below.
- 100 Year Flood Zone – FEMA and the NFIP have used a number of names to refer to this zone over the years. Any location which is identified by FEMA as having a 1% change of being flooded in any given year fits within this description. For example, over the course of a 30-year mortgage, a property would have a 26% chance of flooding at least once during that time period. The NFIP currently uses the flood zone prefixes of A & V to describe any location within this area. You will see the V zone prefix more commonly along the ocean, as it signifies an additional Velocity hazard (generally you can think of this as storm surge or wave action). The letter A indicates (usually, but not always) properties relatively close to water. Common notations that refer to the 100 year floodplain (or a subsection of it) are: A, AE, A1-A30, A99, AH, AR, V, VE, Base Flood, & SFHA (Special Flood Hazard Area). Insurers in the private market generally exclude coverage for locations in this zone.
- 500 Year Flood zone – FEMA & the NFIP have used a number of names to refer to this zone over the years as well, but this refers to any location that has a .2%-1% chance of being flooded in any given year. Common notations that refer to the 500 year floodplain are: X-500 & X-Shaded. Insurers in the private market generally will exclude coverage for locations in this zone, but can be pushed to include coverage for the right price.
- X Flood zone – This refers to any location with less than a .2% chance of annual flooding. Insurers in the private market will usually provide coverage in this zone at standard rates.
Finding your zone – There are many online tools to available that can determine flood zones for individual properties. Users can enter their address into these programs and see the corresponding point on a map. Unfortunately, there are problems with using these tools, since the results do not accurately reflect the actual size of the building or property.
It is important to note that the NFIP defines a building as being within the SFHA if any portion of the building falls within its boundaries. In the example below, the mapping software shows the inputted address as being in zone X. However, upon review of the aerial photo, it’s clear that the “spotted point” is on top of a boat in this person’s backyard, and the edge of the actual SFHA runs directly through their living room. As a result, this building is considered to be completely within the SFHA based on FEMA & NFIP calculations.
The challenge of accurately identifying the correct flood zone a building lies in becomes even greater when using these tools to identify flood zones for office parks, malls, manufacturing facilities, and other large properties. While a property may show up in a certain zone on the online map, the actual building roofline may extend hundreds or thousands of feet from that point and fall into the SFHA. These discrepancies can lead to coverage and sub-limit disputes between insurers and property owners. A famous example of this type of case is the Oprey Mills Mall in Tennessee, which flooded in May 2010. The mall owners claimed they did not know that the property was subject to their policy’s $50M SFHA sublimit, and believed the location had access to a $200M limit. On the other hand, the insurers say they notified the mall owners several times in advance that two-thirds of the mall was in a SFHA and fell under the $50M sub-limit. The mall finally re-opened this year, but the legal battle for both parties has yet to conclude.
Businesses should also remember that banks require companies to purchase flood insurance in order to issue a government-backed loans for properties within a SFHA. For additional information on NFIP Coverage, click here.
About the Author
Seamus King is an Assistant Vice President and the National Flood Insurance Program (NFIP) resource for WGA. He focuses on complex placements with catastrophic exposures.