Broker Playbook for Flood Risk

It’s not your imagination: severe weather losses are happening at a faster rate each year, and the payouts associated with these disasters are rising at an alarming rate.

To further complicate matters when it comes to flooding, it’s not just big weather events that are cause for concern. As an industry, we have a responsibility to discuss and help insureds prepare for the impact of these changing risks.

An Unpredictable Risk

Ninety percent of catastrophic weather events involve flooding, but it’s smaller weather events that more often turn operations upside down unexpectedly for many businesses each year. Small events can include water main breaks, faulty fire hydrants or simply poor drainage in a particular area—seemingly inconsequential failures that can cause big damage. In fact, between 1996 and 2019, flooding events affected 99% of counties in the United States.

Past flood incidents are not necessarily indicative of future risk. Flood risks change over time, and more than half of homes and businesses that experience flooding events have never had an issue previously. When you consider that just one inch of water can cause $20,000 of damage to a property, in addition to the time spent dealing with remediation and the associated business interruption, organizations are well advised to educate themselves about mitigating, preparing for and responding to flood loss.

Mitigation

When choosing land for a commercial property, owners and developers must consider several factors. A key piece of information is the site’s base flood elevation (BFE). This is the height floodwaters are expected to reach during a “base flood,” which is defined as a flood with a 1% chance of occurring in any given year. In flood-prone areas, a building’s lowest floor must be above the BFE. The Federal Emergency Management Agency issues flood maps as flood hazards change over time.

It’s also crucial to closely monitor recent and upcoming development in the vicinity. More paved surfaces in an area can increase runoff. The local drainage system plays a significant role in this risk as well. An area with lots of paved surfaces but a good stormwater management system can handle runoff better than a less developed area with poor drainage infrastructure. Pay attention to the condition of nearby catch basins. If they look poorly maintained, this could indicate that the local public works department isn’t keeping up with its drainage responsibilities.

Preparation

Given the unpredictability of flooding, it is critical for businesses to conduct regular preparedness checks. Crawford receives the most flood claims in September, so we generally suggest that spring is an ideal season for annual reviews of policies, procedures and contingencies. As with all disaster planning, a clear designation of responsibilities for developing and implementing the plan is crucial. The plan should be accessible off-site to all necessary parties and should include agent names, contact information and policy numbers.

Flood insurance experts recommend that organizations periodically inventory their office and commercial spaces as part of their disaster-readiness plans. This means taking photos of office furniture, specialized machinery, electronics, appliances and other fixtures, which can be extremely useful when filing future claims. Ideally, the serial numbers of any on-site electronics should be noted and stored on the cloud, as most policies require them for items valued over $100.

Most flood insurance policies do not cover business interruption. Organizations should consider purchasing a separate plan to cover those costs as part of their overall risk mitigation strategy.

Response

In the event of a flood, an organization’s first call should be to its insurance agent so an adjuster can be assigned as quickly as possible. Then it’s time to start documenting the loss. It’s best to try to get photos of the flooding while it is occurring, which will help tremendously with the claim. The single biggest mistake adjusters see is not documenting loss appropriately—throwing items away too soon and then expecting to be paid.

Flood insurance is a direct physical loss policy, meaning water must physically change something for the loss to be covered. Organizations must document all the items for which they want to be reimbursed in their damaged state before any remediation or removals begin.

Remediation should begin immediately after the damage has been documented in photos. The first step should be to remove any item that has fabric (including carpets, upholstered furniture and desk chairs) as quickly as possible. Mold can start to develop in buildings damaged by water only a few days after a storm, creating moist environments that foster further microbial growth. This leads to deteriorated indoor air quality and various potential health concerns. Flood insurance policies generally do not cover mold or mold-related damage, mold remediation, or any HEPA equipment needed to make the space usable.

It is the business’s responsibility to hire a remediation company. Adjusters and agents are legally prohibited from recommending contractors. Remediation companies are also not always familiar with exactly what is and isn’t covered by a policy, so organizations need to understand what their coverage includes and to contract for services accordingly.

Once retained, the remediation company will gut the areas where the flood occurred. Before they do, policyholders should retain samples of trim, carpet, flooring, cabinets and countertops, as well as the contents of any affected cabinets. It is necessary to have these materials available to the adjuster to verify “LKQ”—like kind and quality—when writing the estimate. This is especially important when the items featured high-quality materials. Without proper documentation, the adjuster will be allowed to use only standard materials for replacement.

Note that HVAC systems can be compromised too, as can appliances.

Education Is Preparation

Like all insurance products, flood policies exist to help organizations through challenging times. When disaster strikes, it is natural to be overwhelmed by the enormity of the loss and unsure how to proceed. That’s why it’s so important for organizations to educate themselves about how to prepare and what to expect in the event of a flood long before an incident occurs. From insurance agents to carrier partners, claims specialists to state and federal flood experts, a wide range of resources and advisors exist to help insureds prepare for, address and recover from flood loss. We all hope that our clients never need our advice or guidance, but we also know that forewarned is forearmed.