A recent report estimates U.S. businesses could spend over $13 billion this year to repair or replace flood-damaged commercial property.* Assessing the risk of flood damage, these experts predict nearly 730,000 U.S. retail, office and multi-unit properties face potential flood damage. Natural disasters can have severe impacts not only on your physical property but also business operations, including work stoppage and lengthy and costly repairs. In fact, one in four businesses never reopens following a natural disaster closure.

In light of National Flood Awareness Week, now is a good time learn what you must know to be fully prepared.

Flood Causes

All 50 states have experienced flooding within the past five years. Property damage due to flooding totals more than $3.5 billion annually and has influenced commercial flood claims to increase to an average of $89,000.

While floods have many causes and can occur anywhere, some of the most common events that lead to flooding include:

• Storm surges in hurricane-prone areas
• Flash flooding from intense rainfall
• Mountainside or hill mudslides caused by heavy episodes of rain
• Snowmelt produced from the frozen ground’s inability to absorb excess water
• Overflows from ice jams that formed when an ice chunk flowing in a river or stream blocks, dams or narrows passageways
• Urban development (e.g., new construction, ground paving) alters the topography and prevents land from proper drainage

New Risk Rating 2.0

As extreme weather events are predicted to increase in frequency, the Federal Emergency Management Agency (FEMA) released an updated Risk Rating 2.0 to take into account more variables, including:

• Distance from water
• Area flood frequency
• Property foundation type
• Cost to repair

The new system also includes flood risk associated from heavy rainfall, which can impact landlocked properties. This is significant as Hurricane Ida alone caused nearly $25 billion in property damage — in part from heavy rainfall and flooding across the Northeast. All new policies after Oct. 1, 2021 were subject to the new rating system with all other policies taking effect on April 1, 2022.

What does this mean for you? Many insureds will see a 15 to 50% increase in their flood insurance policy premium. Your broker may be able to help you to reevaluate your new property rating, provide justification to potential inaccuracies and possibly renegotiate with FEMA. By partnering with a flood expert engineering firm, an audit of your property could uncover cost-saving opportunities, including a potential reclassification. 

What You Should Know About Flood Insurance

A general policy will not cover flood damage as this type of insurance is only available through the National Flood Insurance Program (NFIP). The NFIP will cover all types of floods, including mudslides. It is important to note that the policy does not cover landslides even if caused by heavy rain. Every commercial flood agent, to ensure fair pricing and practices, answers to this government agency.

Do I Need Flood Insurance?

In accordance with the Flood Disaster Protection Act of 1973, your business is required to have flood insurance if you have a federally backed loan or operate within an area designated as a NFIP Special Flood Hazard Area (SFHA). Additionally, if your organization is located within a high-risk flood area and previously received federal disaster assistance (e.g., FEMA grants, U.S. Small Business Administration Disaster Loan Plan), you will be required to maintain flood insurance to be considered for any future federal disaster aid. Be aware that even if your property is outside of an SFHA, your mortgage lender could still require flood insurance. There are two main flood hazard level standards and several sub-categories that the NFIP uses to categorize a company’s risk for flooding and to determine premiums.

• Moderate-to-Low-Risk Buildings (zones B, C, X) These areas are outside of the one percent annual chance:
  • Floodplain
  • Sheet-flow flooding where average depths are under one foot
  • Stream flooding where the contributing drainage area is less than one square mile or protected by levees

• High-Risk Buildings (zones A,V):

• Zone A buildings are within a determined floodplain distance from a river, lake or stream.
• Zone V buildings are within a certain distance from the coast and exposed to natural disasters associated with the ocean.

The NFIP contains a complete list of sub-categories and map to determine which zone your business falls in. 

Associated Costs

Flood insurance premiums are based on several factors that influence your premiums, including:

• A building’s age, height and occupancy
• Your company’s location within the building
• The lowest floor’s position in relation to the flood map’s elevation requirement (only applicable to newer buildings)
• Your deductible and amount of building and contents coverage

If located in a low-risk area, your business is eligible for a Preferred Risk Policy that would cover your building and contents for a few hundred dollars annually. Although flood victims can receive federal disaster assistance, it’s traditionally a loan with interest. In comparison, a $50,000 federal loan at 4% interest would create an estimated $240 monthly payment. However, a $100,000 flood insurance premium could cost less than $100 per month. 

What is Covered?

Your business has the option to purchase one or both of the two types of commercial building flood insurance coverage.

• Commercial Contents covers inventory, merchandise, machinery and any other contents up to $500,000. The NFIP also insures up to $500,000 of your building’s contents, including furniture, fixtures, inventory, machinery, equipment and other property damaged by a flood. The limit for contents coverage is separate from the maximum for building coverage. A policy issued under the NFIP will compensate up to $500,000 for building damage and an additional $500,000 for destruction to your business’ property.                    
• Commercial Building covers your company’s building and contents up to $500,000 each. If your company does not own the building, NFIP will cover up to 10% of improvements you made to the space. The NFIP’s Commercial Flood Insurance provides up to$500,000 in coverage for direct physical building damage from or by flooding. This includes damage to floors, walls, ceilings, plumbing, electrical systems and HVAC. If your business rents, this coverage can provide for tenant improvements your business has performed. Buildings that are eligible for Commercial Flood Insurance include:                    
  • Non-residential buildings
  • Residential buildings with five or more family units
  • Residential condo buildings with at least25% non-residential occupancy

The NFIP will also cover debris removal during the cleanup process. Your business could be eligible for lower rates if you take steps to protect against or prevent flood damage. Review additional information provided by FEMA for protection against the risk of flood damage.

What is Not Covered?

Water damage from problems like a sewer backup will not be covered unless the backup is directly caused by a flood. Here are items not covered by FEMA flood insurance:

• Cars & most self-propelled vehicles (including their parts)
• Currency, precious metals, stock certificates & other valuable papers
• Financial losses caused by business interruption
• Personal property kept in basements
• Property outside of the insured building (e.g., landscaping, wells, septic systems, fences, seawalls)

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*Report from the nonprofit First Street Foundation and global engineering firm ARUP