The term “flood” is used quite liberally in everyday language. Is water backing up in your investor client’s basement? They may tell you, “The basement flooded.” But did it really, or is that Sewer Backup or Water Damage? Because we deem various types of water events “floods” even if they do not meet the insurance definition, it can become confusing for anyone to know where their coverage lies. As you may have witnessed, many people are not aware that Flood coverage must be purchased separately from Property and Liability policies. Water damage in general can be costly. It is important that you and your investor clients understand the differences between water perils and the limitations of Flood coverage.
What is a Flood in Insurance Terms?
FEMA defines a flood as a “general and temporary condition of partial or complete inundation of two or more acres and two or more properties of normally dry land.” In addition, flood damage can only be caused by the “overflow of inland or tidal waters, unusual and rapid accumulation or runoff of surface waters from any source, mudflow, or collapse of land along the shore of a lake or a similar body of water as a result of erosion or undermining caused by waves or currents of water exceeding anticipated cyclical levels.” In other words, a flood may occur when water from natural sources, such as rivers and lakes, breach banks during heavy rains or when the ground is over-saturated with water and causes the excess to seep through foundations or other vulnerable parts of the structure.
How Does Flood Differ from Water Damage When it Comes to Insurance?
Water Damage must be “sudden and accidental” to be covered, such as a pipe bursting or the accidental overflow of a bathtub. In colder seasons, if freezing causes a pipe to burst, one must certify that they have done their best to maintain heat in the building or have fully drained the system and shut off the water supply in order for coverage to be available for the ensuing water damage. Rain that damages the interior of a property after the roof is compromised from a storm also falls under the category of Water Damage. It should be noted that Water Damage coverage is only available under the Special Form policy format.
What is Sewer Backup?
Sewer Backup is another common exclusion on property policies and is defined as “water that backs up or overflows from a sewer, drain or sump.” (ISO) Drains and sewers can back up during storms. So, what your investor client calls a “flooded basement” may or may not technically be “flooded” when it comes to insurance– it all depends upon how the water enters the dwelling. With that stated, investors will want to make sure that any drainage systems in basements are well-maintained and that sump pumps are regularly tested to help avoid water damage from Sewer Backup.
Is a Storm Surge from a Named Storm Considered Flooding?
If your investor client is in an area where their property policy excludes coverage for Named Storm, such as in Tier 1 or Tier 2, they will need to purchase additional coverage if they would like to be covered when the next tropical storm or hurricane rolls through. Though it may not happen frequently, catastrophic coverage like Named Storm can be vitally important as the damage can be the costliest property damage a property owner may experience. To put it simply, your clients could lose their entire investment. Flooding resulting from a storm surge triggered by a Named Storm would only be covered with Flood coverage.
What Flood Insurance Options are Available to my Investor Clients?
Flood coverage may be written through the National Flood Insurance Program (NFIP) or a private insurer, but your investor client will always have a separate Flood limit and Flood deductible. Adding Flood does typically increase the premium significantly as most catastrophic coverages (Named Storm, Earthquake, etc.) do. The NFIP has designated specific flood zones that will impact the rate depending upon the specific flood risk at that site.
Private Flood
Flood Insurance is also available through private insurers. While coverage will be similar to that under the NFIP, private insurers can set their own rates based on a wider variety of factors, especially related to the building itself (age, square footage, number of stories, etc). Private flood options are also typically more flexible with coverage limits, waiting periods, and additional coverage options.
Our Program Flood master policy can be purchased as an add-on to your client’s current coverage. The upsides of this option are that it is included in the monthly schedule and bill, it remains in force unless it is canceled (no annual payment or renewal), AND there is no waiting period– coverage can start right away. Properties with one to four units can obtain up to $250,000 of coverage and five to twenty-unit properties can obtain up to $500,000 of coverage, subject to a $1,000 deductible ($5,000 in Massachusetts). Although this coverage is equivalent to NFIP, some lenders will only accept NFIP.
It is strongly encouraged to offer your clients flood coverage and be sure that if they decline that coverage, they know their exposure.
What Does the Technical Lingo for This Exclusion Look Like in the Investor Client’s Policy?
Sample policy language may look like this:
“We will not pay for the loss or damage caused directly or indirectly by…Water:
- Flood, surface water, waves (including tidal wave and tsunami), tides, tidal water, overflow of any body of water, or spray from any of these, all whether or not driven by wind (including storm surge);
- Mudslide or mudflow;
- Water that backs up or overflows or is otherwise discharged from a sewer, drain, sump, sump pump, or related equipment;
- Water under the ground surface pressing on, or flowing or seeping through:
- Foundations, walls, floors, or paved surfaces;
- Basements, whether paved or not; or
- Doors, windows, or other openings; or
- Waterborne material carried or otherwise moved by any of the water referred to in Paragraphs 1, 2, or 3, or material carried or otherwise moved by mudslide or mudflow.
This exclusion applies regardless of whether any of the above, in Paragraphs 1 through 4, is caused by an act of nature or is otherwise caused. An example of a situation to which this exclusion applies is the situation where a dam, levee, seawall, or other boundary or containment system falls in whole or in part, for any reason, to contain the water.”
*As insurance policies may vary, investors should check their own policy for language specific to covered properties.
What Can This Type Of Damage Cost The Investor Client?
Any catastrophic event has the potential to completely destroy a property and cause severe or fatal injuries. Your clients may be lucky and have little damage from a Flood, or they could suffer a total loss of their investment.
How Can Investors Protect Themselves?
First, investors should know what is in their policy: The investor should refer to the sections of their insurance policy that address Water and Named Storm. It is important that your investor clients know what they are and are not covered for. If you or your client have questions, don’t hesitate to ask your Sales Manager, who would be happy to help!
Investors should ensure that all drainage is working properly: Depending upon the topography of the land on which the property sits, the investor client may have to do some work on their drainage systems to avoid flooding. Just because the property sits on a hill does not mean it is not susceptible. Ground that slopes toward the foundation on an otherwise flat grade can be just as problematic as living in a low-lying area by a river or stream. Investors shouldn’t be hesitant to call in a pro to help them solve any water issues. Hiring them is typically less than the cost of the deductible. And, if your investor client hasn’t purchased Flood, they may not have any insurance to help defray the cost. Prevention is key!
Make sure sump pumps are working: Investors should make sure the sump pump has a backup battery in case of a power outage. Excessive rain, downed trees, and other plant debris back up city drains, causing additional drainage issues. If there is a catastrophic flood there may be nothing your investor client can do besides keep the sump pump running, which may save them a lot of headache and money in a more localized flash flooding event.
Prevent mold: Mold can grow within 24-48 hours after a water event like a burst pipe. If heat is added to the equation, it’s a recipe that mold really loves. After a storm, it is imperative that investors dry out their property as quickly as possible. They may need to call in a water mitigation company to help if the job is a large one. Mold is typically excluded from most property policies so swift action to remediate any mold issue is critical!
Tenants need information about storm safety: Investors may not always rent to a native of the state, and though they may be familiar with the motto “Turn around don’t drown,” that doesn’t guarantee they will know what to do if the waters start to rise around them. Should they bring out the canoe? Climb up on the roof and wait for rescue? As a part of the welcome packet, your investor client may want to include information about how to make an emergency kit and resources to find safe shelter and first aid during a catastrophic event.
Investors should make sure their tenant understands that their personal property isn’t covered: Your investor clients will want to include a clause in the lease requiring tenants to carry renters insurance – and make sure to enforce it. Tenants should be aware that any insurance the investor carries on the property does not apply to the tenant’s personal belongings. Tenants should report any hazardous conditions on the property to the investor immediately. It may be beneficial for investors to include a section in the lease where the tenant acknowledges their understanding of these items. Another option is to purchase a product like our Tenant Protector Plan that does provide contents coverage for tenants.
