Business Insurance Lessons From a Texas-Sized Flood

"Did I turn off the stove when I left the house today?" That's the same feeling I have when a catastrophic storm barrels in my direction. Will my insurance cover the expected damage to my business and property?

While the news media puts a spotlight on personal property and damages to homes caused by the recent hurricanes, it is important not to forget the impact on small businesses, because how quickly a community recovers is closely tied to how quickly its small businesses recover. In theory, business property insurance should help pay for the cost to repair buildings and equipment. But where a flood is concerned, all bets are off. The National Flood Insurance Program (NFIP) offers commercial policy holders up to $500,000 for building property and $500,000 for personal property, which refers to the contents of the business. Yet even with the assistance of the NFIP, small businesses still face a number of hurdles:

  1. A small business must enroll in the flood insurance program. Typically, the government requires a 30-day waiting period on new flood insurance policies. Waiting until the last minute before a catastrophic event will not get you coverage.
  2. Business owners are not aware of the flooding risks. Insurers will require flood insurance if flood maps show a higher level of risk. However, according to FEMA’s testimony to Congress in 2016, about 20% of flood insurance claims between 2006 and 2015 came from outside the areas considered high risk for flooding. In a Wall Street Journal interview with William Sweet, an expert on rising sea levels at the National Oceanic and Atmospheric Administration (NOAA), he estimated that less-severe flooding in monitored coastal towns has risen an average of 30% over the past five years and 150% over the past 20 years. (For related reading, see: Understanding Lender-Required Flood Insurance.)
  3. Damages commonly exceed the flood insurance maximums. Both building structures and specialty equipment can easily exceed the $500,000 cap.
  4. Limited flood program funding. The flood program currently owes the U.S. Treasury $24.6 billion after Hurricane Katrina, Hurricane Ike, and super-storm Sandy. This indebtedness has limited payouts to a fraction of what would be provided under a fully funded program.

Small business owners must review insurance coverages and fully understand the risks for a prolonged business interruption.

Startling Small Business Statistics

According to FEMA, nearly 40% of small businesses close after a disaster. Nearly 52% of small businesses say it would take at least three months to recover from a disaster, according to a 2015 survey of 500 small business owners conducted by Nationwide. Even if a hurricane does not put your company out of business, could your business survive if it was closed for several weeks or months? How much lost revenue will that cause? Standard flood insurance does not insure for financial losses caused by business interruption or loss of use of insured property. (For related reading, see: The 4 Most Common Reasons a Small Business Fails.)

Types of Business Insurance

Because flood insurance has its limitations, business owners should think long and hard about a location away from flood-prone areas or seek to minimize the risk to critical equipment. Similarly, business owners should understand their business insurance needs and how various policy types can work together.

  • Business property insurance - covers damages to buildings, inventory and equipment caused by fire, storm or theft by helping to pay for their repair or replacement.
  • General liability insurance - helps protect your business from property damage claims, bodily injury claims and/or personal injury claims that could put your business’s assets at risk.
  • Business owner policy - combines business property and business liability insurance into one convenient policy; best for small and medium-sized businesses because the combined insurance tends to be more affordable. Some policies may include business interruption insurance
  • Business interruption insurance - helps replace income lost when a business is unable to operate due to a covered property loss such as damage from a fire, theft or wind.
  • Commercial package policy - similar to the business owner’s policy, however more appropriate for larger companies that require greater coverage amounts and policy customization.
  • Commercial umbrella policy - provides an extra layer of liability protection by covering costs that go beyond your other liability coverage limits.
  • Other specialty insurance - covers risks specific to a profession—business vehicles, inland marine, workers compensation, etc.

Remember, none of these policies cover flood damage and have limitations on wind damage from hurricanes.

What a Business Owner Should Do

  1. Review your business insurance coverages with your insurance consultant or certified financial planner.
  2. Review your business flood risk at FEMA.org and your eligibility for flood insurance.
  3. Develop a disaster recovery plan that includes information critical to restarting your business—emergency supplies, online information backup and other steps necessary to ensure your safety and the safety of your employees.

(For related reading, see: Flood Insurance: Myths and Misconceptions.)