Some businesses are required by their lender to purchase flood insurance. But what about those who don't have to buy it?
The easy answer to that question? Yes, of course it does.
At least it does if you want it to survive. According to FloodSmart.gov, the official site of the National Flood Insurance Program, at least 25% of businesses that shut down after events such as floods stay shut down. And no, standard commercial property insurance does NOT cover damage from floods.
Coverage isn't just for businesses located in prime flood zones. If you do business in one of those zones, of course, your lender likely will require you to purchase a flood policy to protect its investment in your venture.
Outside those locations, the choice of whether to purchase commercial flood insurance is yours. Even in areas where the risk is lower, it's never zero. People who live outside high-risk areas file a quarter of all flood insurance claims, according to the NFIP. That, of course, doesn't count those located outside those areas who can't file claims because they don't have flood coverage.
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Questions to ask yourself about flood coverage
When you're evaluating whether you need flood insurance, you should ask yourself questions about your expectations and your needs. In many aspects, flood insurance differs greatly from other coverages for your business. Here are the major issues, according to the Insurance Information Institute.
What do insurers consider flooding?
In general, rising waters. It could be from rivers or streams that overflow, prolonged heavy rain, a storm surge, blocked drainage systems or breached dams or levees, among other causes. Damage from any of these would not be covered by standard commercial insurance.
What water damage would not be considered flooding?
If water comes from above – as rain or melting snow that overflows gutters and leaks onto the contents of your business – it's not considered flooding. This isn't necessarily a bad thing, though. It means that your commercial insurance could cover the damage, regardless of whether you have a flood policy.
What's my risk for flooding?
This is a key question, of course. By far the best indicator for the risk you face is location: Is your business near the coast or a river, lake or stream? What's the weather like? Is there a threat of hurricane, tornado or severe storm? Is the business – and its primary equipment and inventory – on the bottom floor of the building or higher up, where it would be safer?
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Remember this, however. During the past five years, all 50 states have experienced floods or flash floods, according to the NFIP. Business owners who never thought they needed a flood policy learned a hard lesson nearly three years ago during Superstorm Sandy.
How does flood coverage work?
Flood insurance can pay for repairs or replacement of your building and for replacement of the contents of the building, up to your policy limits. You can buy up to $500,000 worth of coverage for your building and up to that same amount for the building's contents. Your policy also can reimburse you for mold and/or mildew caused by flooding. The key word is 'caused' – pre-existing damage won't be covered, and you also likely won't be covered if you failed to take appropriate steps after the flood to eliminate mold and mildew.
If the NFIP limits are too low to cover your business adequately, you can purchase 'excess' insurance coverage – separate from policies offered through the federal program – to provide full protection for your company. This protection typically has an added benefit – business interruption coverage. This coverage helps make up for revenue lost while the business is being repaired or replaced.
How much does a flood policy cost?
The amount varies, of course, based on your risk and the amount of coverage you need. But the annual premium for a business without a basement or enclosure in a low- to moderate-risk location – for $250,000 each in building and contents coverage – is roughly $1,918, according to the NFIP. Doubling the coverage limit would bump up the premium to about $2,940.
Back to the original question
The above questions should give you a lot to think about. Before you make a decision on the question of whether your business needs flood insurance, consider two additional factors:
- The average commercial flood claim is for $89,000, according to the NFIP. Can your business absorb a loss that large without help?
- Don't count on federal disaster assistance to come to the rescue. Most federal aid comes as a loan – not an outright grant. A $50,000 loan at 4% interest would result in an annual payback of $2,880 – for 30 years.
One final warning: Most flood policies won't take effect until 30 days after the purchase, so you can't wait until a threat surfaces to make this decision.