The Need for Flood Insurance

July 6, 2016

Recent Events underscore the need for flood insurance.

Ten inches of torrential rain. A “once-in-a-thousand-year” flash flood. A total of 25 deaths in five counties. More than 1,200 homes destroyed, roads washed out, and entire towns left in ruins.

This apocalyptic event, which included television footage of a house burning while it was swept down a river, was all too real for the citizens of West Virginia on June 23 and the days following.

And though geography of course plays a role in the risk of flood, devastating flood damage can happen almost anywhere.

The risk that flooding presents.
Flooding is a particular threat to midsize and small businesses. According to FEMA, nearly 40 percent of small businesses never open their doors again after being hit with a natural disaster such as flooding. FEMA estimates that, from 2006 to 2010, the average commercial flood claim amounted to just over $85,000. For smaller businesses, such costs can be difficult to overcome, if the property did not have proper insurance coverage. 

Floods also present a range of risks: damage to structure, erosion, possible toxic leaks or other pollution risks, and debris damage. Additionally, they can cause supply chain delays, prevent employees or customers from accessing facilities, and cause of a host of related problems.

The good news is that affordable insurance options do exist, and recent developments in the insurance industry suggest that new efficiencies can be found to help business owners.

Flood insurance—a rapidly changing industry.
The headlines out of West Virginia come at a time when the flood insurance sector is undergoing significant change, with more possibly coming down the road. 

For one, Congress is looking at changes to the way insurance is handled through the National Flood Insurance Program (NFIP). For many businesses, NFIP is the primary source of flood insurance.   In some cases, an NFIP policy is mandated. For example, if a business owner buys a property with financing through the federal Fannie Mae or Freddie Mac programs, they are required to buy flood insurance through NFIP.

But many industry leaders say NFIP is underfunded and needs to be updated. A new law, The Flood Insurance Party Parity and Modernization Act, would allow businesses to buy from private insurers rather than just be restricted to NFIP. This will give companies more options and flexibility in buying flood insurance. The current NFIP program is set to expire in the fall of 2017.

In addition, the existing NFIP program is changing in another significant way. Some carriers have exited the market, and in their place, brokers are starting to use new online tools to write NFIP policies for the business customers. This “write-your-own-policy”  system was often used in the past by carriers that did not insure the risk themselves but created NFIP policies based on information supplied by business owners.  Today, brokers are replacing the carriers as the access point to NFIP policies. This provides business owners with a more efficient and direct way to get flood insurance coverage by working with their agent or broker who probably already has a good understanding of their organization.

Under the new system, a  broker or agent can now get the necessary information, such as property location, past flooding incidents, what flood mitigation measures are in place, etc., directly from their client. The brokers can then send this information to NFIP via online tools, which will use the data to create a policy. The system is quick and easy for business owners, and eliminates unnecessary additional parties.

 As companies work with brokers on their property and casualty insurance packages, qualified brokers can handle all the processing of flood insurance through NFIP, without involving a private carrier as middleman. The result is a more efficient system.

Location, type of flooding will affect your policy.
There’s no getting around it: businesses that have property in areas more prone to flooding will find it harder to get private insurance, and will pay more for what they are able to get. Many business owners in this situation will buy excess insurance in addition to NFIP policies. These excess policies will help cover losses that exceed the limit of NFIP policies, which are capped at $500,000 worth of coverage to structure, with another $500,000 in coverage for contents. 

In addition, flood policies can differ in what they cover. Some are strictly for flooding from a nearby body of water and would not cover heavy rainfall that causes damage, some exclude storm surges such as the one from Hurricane Sandy. However, more standard property policies are starting to acknowledge that “water is water,” and exclude water damages with no exceptions. This means the need for an actual flood insurance policy is becoming greater as more possible damage is being excluded more often.

Solutions for business owners.
Brokers have developed a range of strategies for protection from natural disaster risks, including flooding. Marsh & McLennan Agency’s Flood Service Center (FSC) offers more than 75 years of expertise placing and servicing flood insurance coverage. The center has placed more than 8,000 policies for more than 1,000 business clients across the U.S.,  and can provide advice and help in determining flood insurance options for businesses. 

Through the center, business can get primary flood insurance coverage with NFIP, and purchase additional (excess) coverage if the $500,000 NFIP cap leaves the business with too much financial risk. The center uses data from the Federal Emergency Management Agency to determine flood zone risk for properties.

The policies are written in part with an online purchasing tool  created by Torrent Technologies, Inc.  As noted above, these types of innovations allow business owners to work closely with their brokers or agent to write flood coverage policies specific to their business in conjunction with the NFIP.

As with other types of risk, good planning and preparation are the keys to minimizing potential damages. Businesses cannot assume that flood risk is someone else’s worry.