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Managing your risk by Michael Kelly

NCACC Risk Management Director Michael Kelly writes a regular column on risk management for CountyLines. With more than 41 years of risk management/ insurance experience, he holds the CPCU - Chartered Property & Casualty Underwriter, ARM-P - Associate in Risk Management for Public Entities, CRM - Certified Risk Manager, ARe - Associate in Reinsurance and CIC - Certified Insurance Counselor Professional Designations. He can be reached at michael.kelly@ncacc.org or (919) 719-1124.  For archives of this column click here.

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Oct 26

Flood Insurance – don’t wait to get it!

Posted on October 26, 2015 at 1:07 PM by Todd McGee

As the 2015 hurricane season reaches its peak, the issue of flood insurance comes to mind. Risk Control Manager Bob Carruth pointed out in a recent communication that September is National Disaster Preparedness Month. Flood insurance is one of those areas often overlooked as standard property insurance policies either exclude it entirely or greatly restrict coverage availability through application of very large retentions.

Through the years I have seen counties opt to not purchase flood insurance, especially in low-risk flood hazard areas, with the mindset that the federal government will reimburse them if a given building sustains flood damage and is not insured or is underinsured. While this is generally true, there are some strings attached that are important to understand. I explain it as a “one time perk” whereby if a building without flood insurance that is not expected to be a flood risk actually is flooded, you may seek and recover from the Feds one time, typically with a minimum amount of financial pain. After this “one time perk,” the amount of reimbursement received for flooded property becomes the “new floor” over which it is possible to potentially get a second reimbursement – but only for damage above the previous amount.

If your county claims non-insured damage with the federal government for properties that do not have flood coverage and you receive grant funding, it will be a requirement from that point forward to purchase flood insurance on this same building through the National Flood Insurance Program (NFIP) at least up to the value of dollars received for the property damaged by flood. Failure to do so, or failure to renew in a timely manner (whereby you let the flood coverage lapse), will result in the federal government mandating reimbursement of any previously received grant funds allowed for said property. I have seen this happen and even though the lapse was not intentional – it still took some serious negotiating (and of course, the repurchase of the required amount of flood coverage) to keep from having to repay the federal government a bunch of money.

The rules also mandate that if said property is sold to another party, the purchasing party will also be required to maintain NFIP flood insurance coverage in an amount at least equal to the amount of previously received grant funding, even though the new owner was not the entity that received the previous financial relief!

Let’s look at an example: Consider a $500,000 building that sustains $100,000 of flood damage – for the first time, since it was not in a flood zone, you had not purchased flood insurance – as such, it is possible to seek reimbursement for this uninsured flood loss of $100,000. BUT, after receiving any funds, from that point forward you will be required to purchase at least $100,000 of NFIP flood insurance on the property.
Now, in order to be able to file for reimbursement for the next storm on this same property, the damage will have to be in excess of the previous amount of damage, i.e. you will not be able to collect for any damage below $100,000 through a grant. So continuing on with this example, if during the next hurricane you have a $200,000 flood loss on this same property, you will be expected to collect the first $100,000 from your previously required NFIP flood insurance policy and the next $100,000 potentially from the Feds. You will then be required to purchase a minimum of $200,000 of NFIP flood insurance, thereby establishing a new minimum of $200,000 before any future federal dollars will be available for future uninsured flood damage on this same property.
This ratcheting up of the amount of mandatory flood insurance purchase requirement is likewise inversely affecting the amount of available future federal dollars for the property for any uninsured flood loss, in theory until the amount of mandated flood coverage either equals the reconstruction value of the building or reaches the maximum amount of coverage available for commercial property through the NFIP program. The NFIP’s current maximum limit available on a per commercial building basis is $500,000 for building and $500,000 for its contents.
As a result, it would be a good idea to first analyze the properties that are located in areas prone to occasionally flooding, known as the special flood hazard areas and defined as areas that have a 1% chance of a flood occurring each year. These areas should be carefully reviewed as they are typically areas that should have flood insurance through the NFIP program. (See flood zone classification definitions)
With recent federal legislation such as the Biggert-Water Act in 2012 and the Homeowner Flood Insurance Affordability Act in 2014, it is safe to say premiums are expected to continue to increase as Congress works to make a dent in the $24 billion federal debt incurred by the NFIP primarily due to hurricanes Katrina and Sandy.  How the basic premium is calculated is contingent on a myriad of factors, some of which are:

• Year of building construction
• Building occupancy
• Number of floors
• Location of its contents
• Flood risk (i.e. its flood zone)
• Location of the lowest floor in relation to the elevation requirement on the flood map (in newer buildings only)
• Deductible chosen and the amount of building and contents coverage

In addition, if your commercial property is in a high-risk flood area and you have a mortgage from a federally regulated or insured lender (such as the USDA), you will be required to purchase a flood insurance policy. 

You’ll want to next review your existing standard property insurance policy for coverage extensions (or exclusions) as there may be some flood coverage included, depending on the coverage provider. If you are a member of the NCACC Liability & Property Risk Pool, there is a $5 million limit shared among members per occurrence (with each loss being subject to a $25K deductible) for areas outside of the special risk hazard flood zones (denoted as Zones B, C, and X). This is designed to catch a truly unexpected “fluke” flood loss in areas that typically would not have flood insurance through the NFIP program. For areas that are inside of the special flood hazard zone (denoted as Zones A, AE, A1-30, AH, AO, AR, A99, V, VE, V1-30). The Pool members share a $1 million limit, subject to a $500K building and $500K contents per location deductible. The NCACC Liability & Property Pools’ intent for these areas that are known to be prone to flooding is for members to first utilize the intended federal remedy through the National Flood Insurance Program. Some minimal flood coverage will still be provided in excess of what is available through the NFIP program. It is important to note that the standard insurance markets typically provide no excess flood coverage for these areas, so it is best to check your coverage documents, and/or contact the Pools or your insurance broker if you have additional questions.

Lastly, you cannot wait to buy flood insurance when there is a storm brewing off the Outer Banks. There is normally a 30-day waiting period with a few exceptions:

• If your lender requires flood insurance in connection with the making, increasing, extending, or renewing of your loan.
• If an additional amount of insurance is required as a result of a map revision.
• If flood insurance is required as a result of a lender determining that a loan that does not have flood insurance coverage should be protected by flood insurance.
• If an additional amount of insurance is being obtained in connection with the renewal of a policy.
• If a property is affected by flooding on burned federal land that is a result of, or is exacerbated by, post-wildfire conditions when the policy is purchased within 60 days of the fire containment date.

It looks like we might dodge another bullet this year with lower than normal storm activity – let’s cross our fingers and perhaps our good luck will continue to prevail.