Most businesses are passively aware of the extensive damages a flood can cause, but many aren't adequately insured for potential flooding.
- Congress created the National Flood Insurance Program in 1968.
- The NFIP helps provide federally backed insurance to individuals and businesses through third-party insurance agents.
- Determining the cost of a flood insurance policy requires a conversation with an insurance agent and careful analysis of your geographic location and building structure.
- Small businesses close at an alarming rate following natural disasters, so your business should have an insurance policy even if its flood risk is minimal.
According to the Federal Emergency Management Agency (FEMA), more than 20% of flood claims come from properties outside high-risk flood zones. Regardless of where your business is located, there's likely a risk of flooding.
Recent events in the southern U.S. show just how devastating flooding can be. The most recent 12-month output of average precipitation in the contiguous U.S. reached a 125-year high, and more flooding is expected across the U.S. as we enter the summer months and approach hurricane season.
Disaster preparedness is often overlooked by small businesses, but preparing for disaster and having an emergency plan can keep your business alive in the event of a natural disaster. According to FloodSmart.gov, a website run by FEMA, 40% of small businesses fail to reopen after a natural disaster, and the Small Business Administration says that more than 90% of business fail within two years of a natural disaster. No one likes to assume they'll be hit by a natural disaster, but your business needs to prepare for the worst.
When it comes to flooding, there are a few options for insuring your property. To understand how to best cover your business from flooding damages, it's important to learn about the National Flood Insurance Program. We spoke with a couple experts and researched the program to better understand what small businesses need to know about the program.
What is the National Flood Insurance Program?
Created in 1968 by Congress, the National Flood Insurance Program (NFIP) supports flood insurance for homeowners, renters and businesses. According to the National Association of Insurance Commissioners, "the NFIP is a federal program, managed by the Federal Emergency Management Administration (FEMA), and has three components: to provide flood insurance, to improve floodplain management and to develop maps of flood hazard zones."
"NFIP provides affordable insurance to property owners, businesses and renters to reduce the overall impact of flooding to buildings and communities," said Jared Weitz, CEO and founder of United Capital Source. "The program aims to reduce the social and economic impacts that natural disasters like flooding can produce through the promotion and retention of insurance."
For business purposes, flood insurance is the most important service the NFIP provides. To purchase a flood insurance policy through the organization, you need to speak with an insurance agent. These agents work through third-party agencies outside of FEMA, although FEMA includes a list of insurance companies to consider on its website. FEMA specifies that some agents who help with homeowners, renters or business property insurance may also be qualified to aid in the flood insurance purchasing process.
Does my business need flood insurance?
If you live in the desert, it probably doesn't make sense to invest in flood insurance. If you do, you likely won't need much flood coverage and can opt for a preferred risk policy. While there are extreme cases where flood insurance doesn't make sense, your business doesn't have to be in a town vulnerable to hurricanes for it to experience flood damage.
FEMA places towns into flood zones, showing the risk of flooding in each area. These specific details can be found in the FEMA Flood Map Service Center. To understand how your flood zone relates to your need for flood insurance, it's helpful to speak with an insurance agent. They'll be able to analyze additional information on special flood hazard areas.
"The overwhelming majority of commercial property insurance policies exclude any form of direct water damage to property, which is why flood insurance is necessary for many areas in the United States," said Austin Landes, risk advisor at LandesBlosch.
Depending on your location's flood risk, you may be required to have flood insurance if you have a federally backed mortgage. Also, flood maps change, which means additional information may increase your town's flood risk. If that happens, you may need to alter your insurance policy. To handle changes that may occur, it's important to speak with a qualified insurance agent who can explain how flood zone changes affect your flood policy.
"If your business operates in high-risk areas and you have taken out a business loan from a federally regulated and insured lender, the flood insurance is mandatory by law for the duration of the loan," said Weitz. "Look at the flood maps to understand what level of risk you fall under when considering flood insurance. Look at the insurance policy premium, and you will likely be OK with paying it in relation to the thousands of dollars that 1 inch of rain can cause [in] damages to your business."
Are there other forms of flood damage assistance?
In terms of insurance, you can choose to work with the NFIP or look for a private insurer. Finding a credible private flood insurance company can prove challenging, depending on where you live, but using private insurers can be an effective way to cut costs while still getting a good policy.
For disaster assistance outside of insurance, businesses can either receive an SBA loan or a FEMA disaster grant. According to FEMA's website, the SBA loan must be paid back with interest, and the average disaster grant may only be about $5,000 per household.
Information gathered and analyzed by FundRocket shows that the SBA disbursed 92% of its disaster-related loans in 2016 to cover damages and losses from floods. While paying back the interest on a loan isn't ideal, the SBA tries to make its rates affordable for small businesses in need. If your business's insurance doesn't quite cover the costs of flood damage, a low-interest SBA loan may be your best bet to get your business back up and running.
How much does flood insurance cost?
According to FloodSmart.gov, "NFIP insurance rates do not differ from company to company or agent to agent. All policy premiums include certain fees and surcharges, so ask your agent about these when discussing a price quote."
Factors in your insurance premium include your flood zone and building details. The number of floors on a building and the year the building was created play a role in the prices of flood insurance premiums. Speaking with an insurance agent will help you clarify the cost of your insurance policy. You can also ask to see a flood insurance rate map to better understand different rates across your region or the U.S.
These pricing details make sense, as insurance premiums for large businesses that own lots of property in a state like Louisiana should be larger than insurance premiums for a 10-person business in Arizona. Be sure to speak with an insurance agent about what policy makes the most sense for your business in terms of flood risk, company size and budgetary restrictions.
Why is flood insurance important?
Recent weather events show the severity of flood damage across the country. With 4 out of 10 businesses never reopening after a natural disaster and 90% closing their doors for good within two years of a natural disaster, you need to prepare for the worst. Assuming your business won't face any flood damage is a risk you shouldn't be willing to take. It's impossible to predict weather events months or years in advance, and even daily weather predictions can be inaccurate. The unpredictability of weather events requires a safety blanket. Flood insurance can be that safety blanket.
If you opt not to get insurance or your policy doesn't quite cover the damages of a flood, look into getting a low-interest SBA loan to offset costs. A powerful weather event shouldn't destroy your business's future, and flood insurance can keep your business afloat during a difficult stretch.