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Flood insurance for your small business: Don't get caught out

business flood insurance Flooding is an equal-opportunity destroyer, disrupting the lives of anyone in its path.

Overall, 90 percent of natural disasters involve at least some flooding, according to the Insurance Information Institute (III).

"Businesses -- whether large or small -- need flood insurance," says Loretta Worters, III vice president.

A flood can swamp business owners with thousands of dollars in damages and an unusable work site. That can bring your business to a standstill, potentially threatening your livelihood.

Fortunately, a good commercial flood insurance policy can protect most businesses. They're available through the National Flood Insurance Program (NFIP).

How a flood can kill a business

Flood damage hits a business where it lives -- in the pocketbook. Cash flow is the lifeblood of most business ventures. Without insurance, a business may have to divert financial resources to repair work, putting the venture's day-to-day ability to conduct business in jeopardy.

In fact, 25 percent of businesses that close their doors in the wake of a natural disaster never reopen, according to the Institute for Business and Home Safety (IBHS).

Buying flood insurance can increase your business's survival odds.

According to III, most commercial flood insurance policies cover damage resulting from water inundation triggered by several types of events, including:

  • Heavy or prolonged rain.
  • Coastal storm surge.
  • Snow melt.
  • Blocked storm drainage systems.
  • Levee or dam failure.

Policies also protect business owners from damage caused by flood-related erosion. Such erosion is the collapse of land caused by water from a rising lake, a flash flood, an abnormal tidal surge or some other event, Worters says. 

"Property damaged by erosion is not only destroyed; the land itself may be completely washed away, leaving no chance to rebuild," she says.

Flood insurance doesn't cover damage to vehicles owned by your business. Instead, that coverage would be available by purchasing the optional comprehensive coverage that is available via a commercial auto insurance policy.

You can find out more about what is and isn't covered at the NFIP website.

How to get flood insurance

Don't make the mistake of assuming your commercial business insurance policy will protect you in the wake of flooding.

Mitch Wilson, vice president of public information and education for the Ohio Insurance Institute, says a few insurers may include some flood coverage as part of a business insurance package. However, he adds that the practice isn't common.

"Losses caused by flooding are excluded from most business policies," Wilson says.

To get flood coverage, you generally need to purchase a policy through the NFIP. The NFIP sells flood insurance coverage for both a business's building and its contents.

Businesses that don't own the building in which they operate often choose contents coverage only, unless the lease requires them to cover the structure.

A small business can purchase up to $500,000 in building coverage and another $500,000 in contents coverage from the NFIP. The amount of coverage you choose influences the premium cost, as well as the following factors:

  • Business structure's flood risk.
  • Age of the building.
  • Building's occupancy and number of floors.
  • Location of the business's contents.
  • Deductible the business owner chooses.

Commercial flood insurance premiums vary depending on the amount of coverage and the building.

According to the NFIP, buildings with basements in a moderate- to low-risk area that qualify for preferred rates can get $50,000 of both building and contents protection for $1,016 annually. Bumping the coverage up to $500,000 requires an annual premium of $4,807.

Premium costs are likely to be much higher for businesses in areas at high risk for flooding. The NFIP says such rates are "calculated based on a variety of factors," including a building's elevation level and the materials used to construct the building.

NFIP recommends talking to an insurance agent to find out how much you will have to pay.

National Flood Insurance Program eligibility

To be eligible for NFIP coverage, the community in which your business is located must participate in NFIP.

"If a community is not participating, the business can't purchase flood insurance coverage," Wilson says.

The vast majority of communities do participate, and you can find out if your community is among them by visiting NFIP's community status book Web page.

Also, if you need coverage beyond the NFIP's $500,000 limit, talk to your insurance company. Some insurers offer excess flood insurance coverage above the NFIP limit.

"The NFIP covers the first $500,000, then the insurer insures the higher limits," Worters says.

Should you get flood insurance coverage?

While some business owners may view flood insurance as costly, the product can be a lifesaver for any venture that does not have stockpiles of cash.

Between 2008 and 2012, the average commercial flood claim was more than $87,000, according to NFIP. The total number of losses paid during that time was 361,083.

Some business owners may skip flood insurance simply because they live in a low-risk flood zone.

But such fence-sitters might want to think again, says Peter Moraga, a spokesman for the Insurance Information Network of California.

"I have two words -- 'Superstorm Sandy,'" Moraga says.

Moraga says many business owners who thought they were far from the reach of Sandy's floodwaters suddenly saw their businesses inundated when local levies failed. Many of those businesses had to shut down, Moraga adds.

Business owners in low-risk areas have another good reason to buy a policy.

"If you're in a low-risk area, you're going to pay very low rates for that insurance," he says.

By purchasing coverage, you buy added peace of mind at a relatively low cost.

If you think you'll need coverage soon, don't delay. Most policies don't go into effect until 30 days after they are purchased. 

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