Most business insurance policies don't cover losses resulting from floods, and if you're located in a low-risk flood area, you might be tempted to bypass this important coverage. Flooding can occur anywhere – it's not limited to just coastal areas or river basins. And in a tough economy, the cost of damages from a flood could submerge your business permanently.
If you've invested money in equipment or a building, flood insurance is vital to protecting your business.
National flood insurance protection
In 1968, the National Flood Insurance Program (NFIP) was established by Congress to help property owners protect themselves from the financial devastation of floods. Communities all over the United States participate in the program by practicing floodplain management to reduce potential flood risks. In return, the NFIP provides flood insurance to business owners, homeowners and renters in those communities.
Coverages and rates are set by the NFIP, and do not vary from company to company. Flood insurance rates are determined by factors such as the type of construction and age of your business property, number of floors and building occupancy, as well as your area's level of risk as determined by the Federal Emergency Management Agency (FEMA).
National flood insurance is backed by the federal government and can be purchased though Nationwide Insurance. Once purchased, there is a 30-day waiting period, established by FEMA regulations, before your flood insurance takes effect. So it pays to buy coverage well before water threatens to flow under your door.
A serious threat to business
Flooding is by far the most common natural disaster in the United States. While some floods are caused by tropical storms and hurricanes, many more occur as a result of thunderstorms and heavy rains, rapid snow melt and breaches of levees or dams. New commercial and residential developments can also cause floods due to changes in natural drainage patterns. Regardless of how it occurs, even a minor flood can cause major damage.
In addition to business property insurance coverage, business owners with mortgages from federally-regulated or insured lenders in high-risk areas typically are required to have flood insurance. If you're located in a nationally recognized low- to moderate-risk area, you may not be required to have it, but it makes good business sense to consider investing in such coverage. The premiums may be less expensive, and it will provide a high level of protection if a sudden summer downpour or water main break inundates your property (subject to policy terms).
Federal disaster assistance
If a flood is declared a federal disaster, assistance is often a loan that needs to be repaid, with interest, in addition to your mortgage loan.
How flood insurance works
For businesses in low-risk areas, the NFIP offers a preferred risk policy with coverage for both the building and contents for one low premium, or a contents only policy that’s substantially less. For businesses in high-risk areas, the premiums understandably may be higher with separate building and contents coverage.
Separate deductibles apply to the building and the contents with different amounts possible for each. Payment of the premium is made annually in one lump sum. To lower the premium, you can request a higher deductible, but keep in mind that it will reduce the total claims payment if you have a loss. Claims are usually paid for the actual cash value of the building and/or contents, which is typically the replacement value, less depreciation.