Does My Business Need Commercial Flood Insurance?
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Commercial flood insurance may be legally required for your business depending on its location and your loan type. Flood insurance is not included in any commercial property policy and you will need to buy coverage separately either through the National Flood Insurance Program or a private carrier.
Learn what commercial flood insurance covers and how much coverage costs.
What Is Commercial Flood Insurance?
Commercial flood insurance is a commercial insurance policy that covers losses associated with a flood damaging your business’s structure and other physical property. Flood coverage is not included in any other type of business policy so you will need to buy this coverage specifically if you want the protection. Business owners can buy flood insurance through the National Flood Insurance Program (NFIP) or private insurance companies.
NFIP Flood Insurance
The National Flood Insurance Program provides access to flood insurance coverage for residential and commercial properties in flood-prone areas. The plans through the NFIP are underwritten by Federal Emergency Management Agency (FEMA) but sold and serviced through private carriers and the NFIP.
The NIFP sells coverage limits of up to $500,000 for your business structure and $500,000 for personal property. Bear in mind that the limits of an NFIP policy will usually have lower maximum limits than coverage purchased through private insurers: To address this, private insurance companies have begun selling excess flood coverage, which extends your flood policy's limits.
Private Flood Insurance
Private insurance companies can sell flood insurance for your commercial property, sometimes at a cheaper rate and with higher limits than an NFIP policy. Private flood insurance is not as widely available, meaning obtaining coverage through the NFIP may be easier than a private company.
According to the Insurance Information Institute, the American International Group had the lion’s share of the market, with $173,244 in direct premiums written in 2022. The next two largest companies for underwriting flood policies were Zurich Insurance Group and Assurant, Inc.
How Does Commercial Flood Insurance Work?
Commercial flood insurance has two types of coverage: building property and contents property. Building property insures the structure of your warehouse, office or whatever commercial real estate you own or lease, while contents property covers other physical assets such as equipment and inventory.
If a flood hits your business and it damages its structure and contents, you can file a business insurance claim to recoup your losses. Your insurance company will assign an adjuster to assess the damages and if they are covered, the size of the payout. Keep in mind that your insurance company may request documentation such as receipts to verify the value of your losses so you should always have these items stored in a safe location.
However, you will usually need to pay a deductible before your insurance company contributes to your recovery. A separate deductible can apply for your business’s structure and its contents. So, if you file a claim for both a damaged structure and another for business property losses, you will need to pay two deductibles. Meanwhile, only one deductible will apply if you file a claim just for flood-related damages to your office furniture.
Another note: your flood policy will only apply to a single structure. So, if your business has multiple buildings, you’ll need to purchase a separate flood policy for each structure you want to be protected.
Commercial Flood Insurance Example
In the wake of Hurricane Katrina in 2005, the number of paid losses totaled 168,256. Businesses that fell victim but had flood insurance could file a claim to recoup some of their losses. Nearly half of the $41.1 billion in payouts went to businesses.
What Does Commercial Flood Insurance Cover?
Commercial building flood insurance through the NFIP will insure the following:
- Physical building structure and foundation
- Electrical and plumbing installations
- Water heaters
- Central air units
- Ventilating equipment
- Refrigerators, stoves and integrated appliances such as dishwashers
- Carpets that are permanently installed
- Fixed cabinets, paneling and bookcases
- Window blinds
- Foundation walls, anchoring systems and staircases
- Standalone garages
- Fuel tanks, well water tanks, pumps and solar energy devices
- Pumps and applicable operating equipment
- Awnings and canopies
- Walk-in freezers and food inside
- Outdoor antennas
- Fire extinguishing stations and sprinkler systems
Meanwhile, contents coverage for a NFIP policy will cover the following:
- Goods still in process
- Raw materials
- Machinery and equipment
- Certain industry-specific vehicles such as tractors
- Fire extinguishing stations and sprinkler systems
- Self-propelled vehicles that assist persons with disabilities
- Personal possessions like clothing, furniture and electronic devices
- Drapes or window curtains
- Certain appliances
- Portable and window-mounted air conditioners
- Carpets not covered under the building insurance
- Valuable items such as original artwork
- Furniture and fixtures
- Food freezers (other than walk-ins) and their contents
- Valuables such as original artwork and furs (up $2,500)
- Improvements made to the building as a tenant (up to 10% of contents coverage limits)
- Outdoor antennas
What Isn't Covered?
If you buy flood insurance through the NFIP, you will not be covered for property or losses resulting from the following:
- Economic losses resulting from business interruption
- Cash, precious metals, stock certificates and other important documents
- Automobiles and most motorized vehicles, including their components
- Moisture, mildew, or mold due to owner's negligence
- Sewer or drain backup not caused by eligible flood
- Property and belongings outside of a building or in another structure, such as trees, plants, wells, septic systems, walkways, decks, patios, fences, seawalls, hot tubs and swimming pools
- Personal vehicles
Does My Business Need Flood Insurance?
If you have a government-backed loan, such as a 504 loan from the Small Business Administration, you will be required to maintain flood coverage throughout the loan term if you meet the following three conditions:
- The commercial building being financed is collateral, which is usually the case with commercial real estate loans.
- The commercial building is located in a Special Flood Hazard Area, which is usually near the ocean, a lake or some other body of water.
- The commercial building is also located in a community that participates in the NFIP.
Keep in mind that private lenders may also enforce flood insurance requirements if your business’s location has a high risk of flooding.
How Much Is Commercial Flood Insurance?
The cost of commercial flood insurance premiums can be as high as several thousand dollars every year. Businesses in areas with a history of flooding will naturally pay more for coverage than businesses located in low-risk areas.
As of April 1, 2023, the NFIP put into play Risk Rating 2.0. This new pricing system more accurately determines property flood risks by considering additional factors like flood types, property elevation, distance to water sources and rebuilding costs to adjust rates accordingly.
How To Get Commercial Flood Insurance
Whether your business has been around for years or it's a new startup, flood insurance can save you when the unexpected happens. To obtain flood insurance for your business, follow these general steps:
- Assess your flood risk: This can be done by consulting flood maps provided by the FEMA or by conducting a flood risk assessment with a qualified professional.
- Decide whether you want to buy a policy from the NFIP or a private carrier: Private policies offer higher limits, but the NFIP's longevity gives them more flood insurance experience.
- Gather information about your property: This may include its location, size, construction type, age and any previous flood damage or mitigation measures you have implemented.
- Compare coverage and costs: Review the quotes you receive, comparing the coverage limits, deductibles, exclusions and premiums. Consider the level of coverage provided for your specific needs and weigh it against the cost.
- Purchase the policy: Carefully review the policy documents and ask any remaining questions before finalizing the purchase.
- Renew and review regularly: Renewals are typically done annually. It's important to review your coverage periodically, especially if there are changes to your property or flood risk. If you need to adjust or modify your coverage, contact your insurance provider.