Flood Insurance

With hurricane / flood losses being some of the most severe type of loss an organization can realize in the northeast and east coast, we thought it may be of some interest to overview the issue from an insurance standpoint. Our hope is that this information will allow you to plan better, and avoid future expense.

I make broad statements in this document, and do so with the intent to provide a basic understanding of applicable insurance coverages. This does not describe your specific situation or insurance program.

Hurricane loss away from a natural body of water, such as ocean, lake or river, will be due to wind damage, rain damage, and damage from existing or newly created bodies of water. Wind, and ensuing water damage entering the building due to wind damage, (roof blew off and rain comes in), is covered by your property insurance. This type of water damage is not a flood, and is not excluded by your property policy. You have direct damage coverage to fix and replace stuff, and any business interruption coverage on the policy will also be triggered.

The insurance industry generally considers a flood to be a rising body of natural water. Damage caused by ocean, bay, lake and river overflow entering a building, which was much of the direct damage from Hurricane Sandy, is flood damage. This is excluded by your property policy, and is covered only by a flood policy.

It is of course usual for insureds to have both a property policy claim due to wind damage, and a flood claim due to rising water damage.
Flood policies are very limiting in their scope of coverage. Over 90% of all flood policies are NFIP (National Flood Insurance Program) policies. Although it is now growing, there is still limited private insurance market for flood coverage, and most private flood coverage is written as excess over an NFIP policy. Inherent deficiencies of an NFIP policy include: coverage only for the defined peril of flood, limitation on the amount that can be bought, no business interruption available, limited definition of covered building and contents, and limitations on availability.

Although a flood policy will have a carrier name, such as Selective, Travelers, Hartford, etc., these carriers are servicing carriers only and are paid a fee by NFIP to service the policies and adjust losses. NFIP, a government program created by an act of congress, is the actual insurer, collecting premiums and paying claims.

Your property policy can be amended to cover additional hurricane related loss, and these coverages may include: off premises power failure – both direct damage and business interruption; overhead transmissions lines failure – both direct damage and business interruption; overflow of sewers or drains inside the building.

The transmissions lines coverage has been traditionally difficult to buy, as underwriters do not want to offer it due to the fragile nature of overhead lines. Post Sandy, underwriters have looked to delete this coverage from their current and renewing policies; review your policy closely.

The NFIP was started in 1968 largely as a response to Hurricane Betsy, a 1965 hurricane striking Lake Pontchartrain in Louisiana, killing 75 people and being the first billion-dollar disaster in the US. Before NFIP, people bought from the private market, which underwrote exposure and would charge actuarially supported rates. Consequently, not a lot of flood insurance was offered with affordable terms and not a lot was bought. Development near water was always then financially risky for the property owner, as there was no viable insurance market, and therefore little lending. Shore development was generally limited and small.

NFIP set about providing coverage at actuarially unsupportable, subsidized rates. This took a lot of the risk out of coastal development. As of 2010, NFIP had a deficit of $17b, and the current deficit has grown to approximately $24b. Congress has continuously had to act to replenish NFIP, sending out regular notices of program expiration and then congressional re-authorization.

There have been two relatively recent changes to the NFIP, with one seeking to promote NFIP solvency and the following one clawing back at those provisions. Biggert-Waters Flood Insurance Reform Act of 2012 allowed for rates to move towards real actuarial considerations, and remove the grandfathering of unsupportable low rates. Then, the Homeowner Flood Insurance Affordability Act of 2014 effectively re-instated grandfathering of low rates, and delayed the implementation of other premium increasing measures of Biggert-Waters.

Over the last few years, my office has worked on a large number of wind / water losses. It may be prudent to consider that this may continue, and to think what our clients may be able to do about it. We have to recognize that we may be realizing an increased exposure in both frequency and severity to hurricane and flood losses, while at the same time the cost of risk transfer in the form of insurance is likely to get higher.

The first basic risk management answer is avoidance. Avoiding exposure to loss that can be avoided with acceptable cost to the organization or its future should be considered. In business this makes more sense as proximity to water is largely happenstance, excluding port businesses. For the shore house, avoidance is tough as the point is to be on or at least near, the exposure. This discussion is for businesses.

Avoidance for a business means recognize your proximity to water, and to those fixtures, surfaces, elevations, and spillways which have the potential to allow for loss due to water. Complete avoidance would be to move. With commercial real estate what it is now, maybe moving to a lower exposure
facility, and if you do it and upgrade the facility or lower your rent, it may be an attractive option.

If complete avoidance is not practical, it may be possible to mitigate exposure by making changes to the physical nature of the exposure basis, whether through excavation including additional drainage, berms, etc. and also elevating property. You may also move contents and utilities property out of lower floors and off of the floor.
After you’ve done any worthwhile avoidance or mitigation get a pro-active plan. The first aspect of this is to consider buying flood insurance and get a quote. You do not have to be in a designated flood plain to buy a flood policy. Remember that these policies have important limitations and you need to know them and act accordingly. We can review with you if you like.

Besides insurance, include moving plans and contingency site. Making these plans is not really all that complicated, but it does require thinking, going thru a checklist and coming up with answers and then setting things up so that should you need to, these activities can take place quickly with delegated responsibilities laid out. My office can help you with this process. If the plan becomes too arduous or impractical, assess the impact on losing this facility to flood or wind. If this is your main or only facility, these are big questions. Another option would be to downsize or break up this facility to at least make the exposure smaller.

Doing the plan makes all the difference. Even when insured, an unplanned for loss is a much bigger deal financially and emotionally than when a plan had been created, and can be worked and relied on.

Thanks for reading.

Dan Gilligan – AAI, CIC, CRM