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How much can your business stand to lose? It's not a happy thought, but unfortunately, that's the question you must ask yourself when deciding on insurance coverage.
According to the National Flood Insurance Program, at least 25% of businesses that close after disasters like floods never open their doors again. The average commercial flood claim stands at $89,000, an amount that can cripple or bankrupt a small business1. Given that flooding is the #1 U.S. hazard, and floods occur in all U.S. states, floods are a serious threat to your business and livelihood. And since business insurance policies do not cover damage from flooding, a separate flood insurance policy is necessary to protect the cost of your building, equipment, inventory, and supplies.
Business insurance vs. flood insurance
Business owners often mistakenly assume that their business insurance policy protects the business' property from all disasters. With water, coverage depends on the origin. Business insurance only covers damage from water that hit above the building directly before causing damage, such as heavy rain. Water that hit the ground before damaging your business is considered flood water and is not covered by a business insurance policy. Flood water culprits include overflowing rivers and streams, melting ice and snow, blocked or overflowing sewers and storm drains, overloaded dams and levees, and faulty pump stations. Flood insurance protects your business against the cost of damage from these flood waters.
Flood insurance protection
There are two categories of commercial flood insurance:
Preferred risk policies are availabl to businesses in areas at low to moderate risk of flooding. These policies generally offer insurance on both the building and its contents in one policy, though you could opt to insure only the contents. Preferred risk policies provide up to $500,000 of insurance on the building, its structure, its installed systems, and its improvements, and up to another $500,000 on the contents, including furniture, equipment, and inventory.
Standard policies are available to businesses unable to qualify for preferred risk policies because they are located in areas at higher risk of flooding. Standard policies insure the building and its contents separately.
You can calculate your business' risk of flooding using the tools provided by the National Flood Insurance Program.
Buying flood insurance
Flood insurance is regulated and made available through a federal government agency, the National Flood Insurance Program (NFIP). However, you cannot purchase flood insurance through the NFIP itself; you must purchase flood insurance through a licensed insurance agent. Due to the NFIP's regulation, you will pay the same rate regardless of the agent and insurance provider you choose to protect your business.
According to the NFIP rate table, a business that buys $250,000 each in property and contents flood insurance, is located in a low to moderate risk location, and does not have a basement would pay $1,918 per year. That's likely a better option than relying on federal disaster aid, which is given as a loan and must be repaid with interest anytime the government chooses to make aid available.
Important tips to remember when buying flood insurance:
With few exceptions, the purchase of flood insurance is subject to a 30-day waiting period before coverage takes effect. That means if you wait until a damaging storm or other flooding situation is predicted, it will be too late to insure your business' property and equipment.
While flood insurance is not legally required, your business mortgage lender may require you to purchase a policy, depending on the terms of your loan and your business' flood risk.
When you purchase flood insurance for your business, you pay for a full year in advance.
If the standard commercial flood insurance limits of $500,000 for the building and $500,000 for its contents are not sufficient for your business, you can purchase excess flood insurance, which will pay after your standard flood insurance policy has paid its policy limits. Excess flood insurance is available to cover an additional $1,000,000 on your business' building and an additional $100,000 on its contents.
Standard commercial flood insurance will not pay business interruption benefits, which means if your business shuts down due to flooding or associated repairs, the insurance will not pay for lost revenue. Excess flood insurance, however, does include business interruption coverage.
With flooding, even one inch of water can cause significant property damage and expense. Don't put your business at risk, and don't wait to find out how much your business can lose before shutting down. By then, it might be too late. When you figure what it would cost to replace your building, equipment, inventory, and supplies, it's easy to see commercial flood insurance is a necessary business expense.
Charlie Amato is the Chairman of SWBC. With more than 40 years of experience in all aspects of insurance operations, underwriting, and product development, Charlie is known in the business community for his innovative, relationship-building approach.