Dealing with the Deluge – Protecting Your Business Against Floods and Other Risks:Which Insurance Coverage is Right for You?
By Nerino Petro at 7 July, 2008, 5:15 pm
Protecting Your Business Against Floods and Other Risks:
Which Insurance Coverage is Right for You?
By Gordon Davenport III, Connor Sabatino, and Krista Sterken
The severe storms that struck southern and central Wisconsin in early June left hundreds of homes, roads and businesses under several feet of water. The misery was compounded when many home and business owners found themselves without insurance coverage for their losses. A number of law offices were impacted as well. Standard property insurance policies cover damage to property caused by such things as fire, tornado, wind, lightning and hail, but they generally do not cover damage caused by floods and certain other perils. It is important for law offices to be aware of that, and to know what options are available to fully protect their businesses.
Standard Property Insurance
Standard property insurance policies generally do not cover damage caused by flood, sewer backup or earthquake. They also do not cover losses and expenses due to interruption of the business, unless that coverage is purchased, usually at an additional charge. And even when business interruption coverage is purchased as part of a standard policy, it will not apply to interruption caused by excluded perils such as floods.
Yet floods are a real risk in many parts of Wisconsin, as we have seen this year. What options are available to law offices to protect their property and business against this risk?
National Flood Insurance Program
The federal government offers flood protection through the National Flood Insurance Program (NFIP). Unfortunately, this program is not always a viable option because it is not available to everyone. In order to qualify, the property must be in a designated flood plain, and the community in which the property is located must opt-in to the NFIP and comply with FEMA standards for flood control measures. Further, NFIP rates and terms are set by the government and cannot be customized to meet individual needs. The amount of protection is capped at $500,000 for commercial property, with an optional “contents” add-on also capped at $500,000. The contents add-on covers actual cash value, not replacement costs. Therefore, some law offices may find that NFIP coverage is not adequate to meet their needs even if they qualify for it. In that case, private coverage may be an option.
Additional Coverage Available Through Standard Property Insurance Policies
Many law offices purchase business interruption coverage as an addition to their property policies. It may also be possible to obtain flood and earthquake add-ons. Flood coverage is often written as excess coverage in addition to the NFIP, and can sometimes be written in lieu of the NFIP program. “For high-risk flood zones, private insurers may only be willing to provide flood coverage in excess of the $500,000 NFIP limit, and not in lieu of the NFIP,” says Kellye Golden of Mortenson, Matzelle & Meldrum, a Wisconsin insurance broker. “Once businesses in high-risk flood zones secure the NFIP coverage, they can obtain coverage in excess of the $500,000 from a private insurer if the NFIP limit is insufficient.”
If business interruption coverage has been purchased, adding flood coverage should extend the business interruption coverage to interruptions caused by flood. But it is important to double-check the language of the policy. It is also possible to purchase coverage for interruptions to business caused by loss of utility services. This coverage may come in handy if the office space escapes actual flood damage but is out of operation due to problems with utilities.
Difference in Conditions Policies
Large law offices may find the coverages available as add-ons to standard property policies to be inadequate. If so, a separate policy may be available. One type of policy commonly used for non-standard coverage is a Difference in Conditions (DIC) policy.
DIC policies are not standardized, and they are given different names by different insurance companies. But they generally fall into three categories: DIC property coverage, DIC business interruption coverage, and DIC loss of utilities coverage. These policies provide coverages that are analogous to those which can be added to standard property policies, but on a larger scale.
DIC property policies are written much like a standard property insurance policy, except that they specifically cover losses caused by perils excluded under standard policies, such as flood or earthquake.
Similarly, DIC business interruption policies cover losses of business income resulting from perils typically excluded, such as flood or earthquake. Coverage can be purchased for a maximum dollar amount and for a maximum period of time. Businesses must typically submit information about their revenues and profits to determine the amount of coverage available.
DIC loss of utilities policies cover losses due to a lack of incoming utilities. These policies are also sometimes referred to as “off premise power coverage”. While standard property policies may cover a loss of power due to a downed tree from a thunderstorm, they typically do not cover losses due to an excluded peril such as flood or earthquake.
Every DIC policy is a customized policy. This allows for flexibility in crafting coverages, but requires great care in reviewing policy language to make sure the desired coverage is provided.
Which Coverages Are Right For You?
The cost for DIC policies typically starts at about $10,000 per year. This may be appropriate for large law offices. For smaller offices, purchasing additional coverages as add-ons to a standard property policy may be a better solution. All law offices should evaluate their need for these kinds of coverages. Even law offices located in upper floors of large buildings may need coverage if, for example, a flood prevents access to the building or knocks out power.
Offices that face no risk of flooding may still benefit from coverage for loss of utilities. However, “business interruption and loss of utilities endorsements can vary widely as to what coverages are provided”, warns Christopher Fill, Vice President of AON Risk Services Central, Inc. “It is important that the policy specifically defines whether coverage is limited to gas, water and electric or if it is extended to telephone and internet.”
Electronic Data Storage
It is important to keep in mind that insurance only covers financial losses and cannot replace unique files, documents, or evidence that may be kept in a law office. As computer technologies increase and costs decrease, it is becoming easier to make use of imaging technology to store documents electronically. Once files and documents are in electronic form, off-site data storage and backup services can be used to further protect critical materials.
Finally, it is important for law offices to ensure that their policies contain coverage for Electronic Data Protection (EDP). Even partially destroyed computers can sometimes have their hard drives restored, but this can be costly, and is sometimes not covered by standard property policies.
Gordon Davenport III, U.W. 1983, practices insurance litigation with Foley & Lardner LLP, Madison. He acknowledges summer interns Connor Sabatino and Krista Sterken for their contributions to the article.