A Dive into Water Perils: Maximize Your Insurance Protection
When it comes to water, we’re stuck in a love-hate relationship. In Michigan, we’re surrounded by it and celebrate it every summer when we launch our boats, head north with the jet skis, and plan our beach outings. Yet, water can quickly turn on us, replacing fun with considerable property damage. How can we hold onto a positive relationship with this potentially volatile neighbor?
Fortunately, there are a variety of insurance policies to protect you and your business. However, what these policies do and don’t cover varies from one carrier to another, making it vitally important to do your homework.
Commercial Property Coverage
The standard Commercial Property policy excludes coverage for most water-related losses, e.g., water-sewage backup, flood, surface water, waves, and several other water-related conditions.
Fortunately, your policy can be endorsed to add coverage for many of these exposures.
Most commercial property policies don’t automatically include flood insurance coverage. The coverage is either endorsed (added) on a policy, purchased as a separate policy, or simply excluded and/or not purchased. The ease of purchasing coverage also depends on your location. If located in a flood-prone area, the process and documentation required are much more involved than if you’re in a less flood-prone area.
Most flood insurance is written through the federal government (NFIP – National Flood Insurance Program) Floodsmart – FEMA, NFIP. However, private carriers are in the marketplace (and, again, depending on location) may be endorsed to your current Property Policy. Notably, the NFIP can only write specific Property Values—depending on a Residential or Commercial Building—and is unable to provide Loss of Business Income on a Commercial Policy.
While we all think we know what a flood is, it has a unique definition for FEMA (Federal Emergency Management Agency) and NFIP:
“A general and temporary condition of partial or complete inundation of 2 or more acres of normally dry land area or 2 or more properties (at least 1 of which is the policyholder’s property) from overflow of inland tidal waters; unusual and rapid accumulation or runoff of surface waters from any source; or mudflow.”
Some private insurers may define it slightly differently.
Nevertheless, for insurance coverage to apply to a flood 1) It must be purchased and 2) It must be defined as noted above (or similar).
Depending on your location, the premium cost can range from several hundred to several thousand dollars. Typically, private insurer deductibles start at $25,000 and are increased based on proximity to a flood zone and an insurance company’s comfort level with your exposure. NFIP deductibles can range from $1,000 up to $50,000. Most policies include an aggregate flood limit; once the coverage limit has been reached in a policy term, no additional flood coverage is available during the term. If your policy has a $250,000 flood limit and you sustain two losses of $125,000, your policy will not cover any additional flood losses for the duration of the policy.
Water Backup (Sewer and Drain) Or Sump Dump Overflow
Similar to Flood coverage, the typical property policy may not automatically include coverage for Water Backup or Sump Pump Overflow. This coverage can be simply added to most policies.
It’s important to know that some policies may include water sewer backup but not overflow coverage. As noted by Zurich Insurance Company: “Most jurisdictions define a backup as originating off your premises causing a reversal of the direction of water from the public lines into your sewer, sump or drain lines…whereas an overflow occurs due to a pipe blockage on your property.” Zurich-Water Damage: Are You Sure You’re Covered? Simply put, a water backup originates off-premises, while a sump pump overflow originates on-premises.
In the event of a covered loss, the deductible which applies is typically your “all-other-peril deductible” which can be anywhere from $1,000 and higher (but much lower than a flood deductible).
A very important item to review within your policy is whether or not the insurance company has added the definition of water backup/sump pump overflow to the flood definition.
Over the past several years, many insurance companies have included any type of water peril/damage to the definition of a flood. If this is the case, it’s significant for two reasons:
- If flood is excluded from coverage, then you have no water damage coverage at all (flood or water backup).
- If you do have flood coverage, a water backup loss will take the flood deductible—which is substantially higher than the all-other-peril deductible.
If “water/sewer backup” has been added to the flood definition, the insurance company may be able to endorse (modify) your policy to specify the “all-other-peril” deductible. It’s worth asking your insurance company if they’ll endorse the policy with a smaller deductible.
With these considerations, we’ve just splashed the surface of the various ways that water can adversely impact you. Because water perils are many and often complex, the Oswald client service team is equipped to help you navigate these sometimes murky waters. Reach out to us for guidance and look for more to come on this important topic.
For more information, please contact me directly or learn more on our Property & Casualty page.
Associate Client Executive, Property & Casualty
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