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December 12, 2013
Every owner and manager of commercial property should be aware of significant, recent changes to flood-insurance coverage to help them prepare for the “unthinkable” if their properties are unexpectedly damaged by flooding. They should be knowledgeable about the potential flood risk to their individual properties and, as necessary, take appropriate actions to insure and mitigate against those risks.
Those who think “it can’t happen to me” might want to think again. Most people never expected flooding to occur in New York City’s Lower Manhattan subways or buildings, before that occurred as a result of Hurricane Sandy in 2012. Likewise, the devastation to commercial and personal property caused by the record rain storms in northern Colorado in September was an unforeseen disaster for many property owners.
Owners and managers of commercial property in downtown Seattle and many other areas of Western Washington, for example, may have nothing to worry about. Commercial property and business owners in Seattle’s University Village shopping center probably felt that way before early October. But then thousands of gallons of water gushed from a broken 83-year-old, 16-inch pipe and threatened their businesses.
For commercial properties where the flood risk is not “cut and dried,” owners and managers can take a few relatively simple steps to assess and ultimately address that risk as necessary. That includes most low-lying areas, like portions of the Kent Valley, Renton and east King County.
No more “throw-ins”
For many years, flood insurance was essentially a “throw-in” with earthquake insurance covering commercial property located outside of recognized flood plains, adding little or nothing to the cost. That has changed due to local and national events in recent years.
When 15 inches of rain fell in southeast King County in a 24-hour period in January 2009, the U.S. Army Corps of Engineers announced that there was significant damage to the Howard A. Hanson Dam that controls the Green River. At the time, the corps said it might have to flood parts of the valley in order to save the dam.
Fortunately, that disaster was averted, but the episode was a very real and obvious exposure to which insurance companies reacted.
Nationally, the $65 billion in damage caused by Hurricane Sandy in the U.S. last year also caused insurance companies to take a closer look at their flood insurance coverage.
In 2012, total catastrophe losses (millions of dollars in damages caused by individual floods, earthquakes and other discrete, major events) comprised 9.4 percent of insurance carriers’ losses, compared to 3.4 percent in 1990 and only 1 percent in 1960. Also in 2012, non-catastrophe weather-related losses accounted for 21 percent of the losses incurred by insurance carriers.
The net result: Flood insurance is now based on actual risk for a specific property, and is no longer a “throw-in” offered by insurance companies to purchasers of earthquake insurance for properties located outside of normal flood plains.
The federal government also has changed its policies. The Federal Emergency Management Association now bases its flood insurance premiums on a specific property’s actual risk, and will no longer subsidize policyholders of its National Flood Insurance Program for properties in severe and repetitive loss areas. As a result, business properties covered with subsidized flood insurance can expect annual rate increases of 25 percent until the premiums reflect the full risk.
What to do?
The first step for commercial property owners and managers to deal with these new realities is to identify the flood risk of their properties. To learn relevant flood-related data about an individual site, start with FEMA’s FloodSmart.gov; Google Earth’s Stay Dry Overview; or RiskMeter, a tool used by industry professionals. Those include base flood elevation, soil quality and its proximity to faults, rivers and streams.
Stay Dry Overview, for example, identifies known flood plains on existing mappings, and identifies whether a specific property falls within a 100- or 500-year flood zone. FloodSmart.gov will tell the user when a new flood-plain mapping will be in place.
Commercial property owners and managers and their insurance brokers can determine if flood insurance will be required by their lenders or if the rates for their current flood insurance are likely to increase significantly over time.
In short, flood-insurance coverage will steadily evolve as flood-plain mapping improves. Indeed, some properties covered by flood insurance today may not be eligible in the future, or the coverage for those properties may not be affordable.
Most commercial property owners’ insurance brokers can refer them to their in-house loss-control engineers for help with pre-disaster mitigation. They’ll work with the commercial property owner or manager to identify the property’s exposure to flooding, evaluate the effectiveness of current controls, and implement solutions to mitigate and eliminate risks. On an ongoing basis, they can measure and evaluate those solutions, and adjust them as necessary.
Commercial property owners and managers’ best bet is to be prepared by understanding their potential flood risk, and taking actions to address that risk before the unthinkable occurs.
Erik Kuhn is vice president-commercial practice leader at Bothell-based HUB Northwest, which provides general commercial insurance, group benefits insurance, surety bonds and risk management products to owners and managers of commercial real estate.