Water is an essential part of life. But as many unlucky business owners can attest, when water is in the wrong place it can be a destructive and costly force. Water can cause damage or destroy a company’s building and the contents inside. If your business is damaged by water, your first question will probably be, “Does my insurance cover this loss?” The answer to that question will depend on the cause of the water damage and the exact business water damage insurance and other policies that your business has purchased.
Who Needs Insurance For Water Damage?
If you have an HVAC system in your office building, your business could face the threat of water damage. If your business has any machinery, appliances, or other equipment involving water, your business can be damaged by water. Even something as simple as a malfunctioning toilet or sink can lead to extensive water damage. Any business with a physical presence can be damaged by water from storms or floods. Almost every type of business is susceptible to a range losses caused directly or indirectly by water. Fortunately, there are many insurance policies (and riders and endorsements) available to cover these risks and protect your business.
Water Damage And Commercial Property Insurance
There is no clear cut industry-wide rule dictating water damage coverage in commercial property insurance. Some commercial property policies include coverage for certain kinds of water damage and some limited policies may not include coverage for any water damage. When shopping for insurance (or reviewing your current policy) it is very important to carefully read through the causes of loss form to figure out when water damage is covered and when it is excluded. Consulting with an insurance agent can help you get to the bottom of exactly what is and isn’t covered by any given commercial property policy.
Although there are plenty of differences among the available commercial insurance policies, many policies use similar concepts to distinguish between various water damage scenarios. The following sections will discuss some common water damage risks that insurance may be able to mitigate.
For related information read about home water damage.
Many businesses located in colder regions of the country have to deal with the risk of pipes freezing. Freezing temperatures can lead to pipes suddenly bursting, and burst pipes can lead to significant water damage for a business. To make matters worse, the burst pipe might be hidden within a wall, floor, or ceiling – thus allowing even more extensive damage before anyone notices the problem.
Many (though not all) commercial property policies will cover the damage caused by bursting pipes. However, most of these policies specify that the loss will not be covered if the pipe froze as a result of negligence or absence. This means that during the cold months, the insured business must take appropriate steps to prevent the pipes from freezing and bursting. Common preventive measures include maintaining proper heating and insulation to keep pipes from freezing and draining all water from plumbing systems if a building is unoccupied or not sufficiently heated.
What if the water damage was not caused by a sudden pipe burst, but instead was caused by a pipe or hose slowly leaking over a period of time? Appliances, HVAC systems, sprinklers, and plumbing systems might develop leaks of water or steam over time. This might be due to wear and tear, degradation, rust, or gradual breakdown. The damage caused by a slow and gradual leak can be just as costly as the damage caused by a burst pipe.
It is important to note that many commercial property policies will not cover losses caused by water leakage or seepage that is gradual, slow, intermittent, or constant. In these cases, the insurance company may point out that they insure against damage that is sudden and accidental and not damage resulting from owner’s negligence or the normal wear and tear of materials. The property insurance coverage probably will not apply if the damage could have been prevented by regular maintenance and preventive measures.
As the examples above illustrate, there is a big difference between a pipe that suddenly breaks or bursts (which is often a covered peril) and a pipe that gradually degrades or breaks down (usually not a covered peril). As always, the wording of your policy is crucial. Make sure you find out what types of situations your policy covers before you actually have to deal with a claim.
Water Damage Exclusions
Many commercial property insurance policies have language stating that water damage will not be covered in a number of specifically excluded situations. This might be called a “water damage exclusion” or a “flood exclusion.” According to an article on about.com, some policies say the insurance company will not pay for losses caused directly or indirectly by:
- “flood, surface water, waves, tidal water or overflow of any body of water, or spray from any of these, whether or not driven by wind.
- water or water-borne material which backs up through sewers or drains, or which overflows or is discharged from a sump pump, well or other system that is designed to remove subsurface water which is drained from the foundation area; or
- water or water-borne material below the surface of the ground, including water which exerts pressure on, or flows, seeps or leaks through any part of a building, sidewalk, foundation, driveway, swimming pool or other structure or water that causes earth movement.”
The about.com article also notes that these losses are excluded from coverage regardless of whether they were caused by “human or animal forces or any act of nature.” So property losses caused by waves in a bay would be excluded whether the waves were created by a a crane operator dropping a boat into the bay, a blue whale splashing its tail, or the strong winds of a storm.
The exclusionary language quoted above is just one version of what might appear in commercial property policies that you encounter. As always, it is strongly recommended that you speak with an insurance professional about the costs and benefit of getting coverage for situations that are significant to you and might otherwise be excluded from coverage.
Most exclusions say something to the effect that a loss will not be covered if an excluded peril causes the loss directly, indirectly, or concurrently with another peril, even if the other peril is covered. This is often referred to as a concurrent causation clause. The flood exclusion in many commercial property policies is written to exclude losses when a flood is a direct, indirect, or concurrent cause of the losses.
Picture a scenario in which your business is damaged when wind breaks open your building’s front door, which then allows flood waters to flow into the building. Your property insurer might say that wind is a covered peril (so your door will be replaced) but flood is an excluded peril even if it is acting concurrently with wind. Because of the concurrent causation clause, there is a good chance that the water damage will not be covered even though the water would not have entered your building without the help of the wind. This is one of the reasons why many business owners choose to purchase both commercial property insurance and flood insurance.
Every year, floods cause serious damage to businesses across the United States. According to floodsmart.gov: “From 2008 to 2012, the average commercial flood claim was more than $75,000.”
Some people mistakenly believe that floods are covered perils within normal commercial property insurance. As mentioned above, standard commercial property policies actually exclude floods from coverage.
To protect a business from the risk of floods, qualifying businesses can purchase a flood insurance policy from the National Flood Insurance Program (“NFIP”) or from a private insurance company (though this is less common). The federal government created the NFIP because most private insurers calculate that floods are too expensive to include as a covered cause of loss, but many homeowners and commercial property owners still need some insurance protection against floods. The NFIP defines a flood as:
“A general and temporary condition of partial or complete inundation of two or more acres of normally dry land area or of two or more properties (at least one of which is your property) from:
- overflow of inland or tidal waters;
- unusual and rapid accumulation or runoff of surface waters from any source;
- mudflow; or
- collapse or subsidence of land along the shore of a lake or similar body of water as a result of erosion or undermining caused by waves or currents of water exceeding anticipated cyclical levels that result in a flood as defined above.”
Be aware that there is normally a 30-day waiting period before a flood insurance policy goes into effect. So if you think your company might need flood insurance, you can’t wait to purchase it until the weatherman is predicting floods in your area.
The cost of your business’s flood insurance policy will depend on a variety of factors, such as:
- The amount of coverage purchased (dollar limit);
- Whether the property is located in an area with a low to moderate-risk of flooding or a high-risk area;
- Whether the policy covers only the buildings, only the contents of the buildings (also known as “personal property”), or both; and
- The type of building and the elevation (particularly in high-risk areas).
You can find more information on this topic in the Enhance Insurance flood insurance article.
Backup of Sewers or Drains
Picture this: you arrive at work on Monday morning and find that a sewer or drain has backed up and as a result the first floor of your building has been transformed into a swampy, soggy mess. The office furniture, computers, carpets, walls, and filing cabinets are ruined. Will your property insurance cover this?
If your commercial property policy contains a sewer and drain exclusion (often part of the flood exclusion), unfortunately you will probably not be covered in the scenario described above. Most commercial property insurance forms specifically exclude losses caused directly or indirectly by water or water-borne material (e.g. sewage) backing up through sewers or drains.
The effect of the sewer and drain exclusion usually means there is no coverage regardless of whether the clog was located in a drain on your premises or if the source of the backup was located outside your property in a utility or municipal sewage/drainage pipe. If you want to be covered for these losses, many insurers will allow you to purchase an endorsement (or rider) that basically eliminates the normal exclusion for sewer or drain back ups and overflows.
Without an endorsement for sewer and drain coverage, your business would most likely be exposed to the risk of losses caused (directly or indirectly) by:
- Your office toilet backing up and causing sewage to overflow and ruin any building contents within its reach;
- A utility’s sewer pipe clogging, backing up into your building through a drain on the first floor; or
- Your building’s sump pump getting overwhelmed and overflowing rainwater into the basement and its contents.
The sewer and drain exclusion is often overlooked, much to the regret of business owners. This is why it’s important to find out if you need to buy an endorsement to gain the coverage you may have assumed incorrectly you already had.
Water Damage From Storms
Storms can lead to water damage in a number of ways. The following examples show why the type of insurance you need will depend on the way the water intrudes on your property.
What if heavy rainfall causes nearby bodies of water to rise (e.g. rising creeks, culverts, or lakes) and enter your business’s basement or ground floor? This would be considered flood damage, and only flood insurance would help your business recover.
What if the heavy rainstorm breaks through your roof and water pours down onto the filing cabinets and computer system stored in your building’s attic? Flood insurance will not cover the damage because this does not fall within the definition of a flood. Some commercial property policies would cover this damage, and some would not – it just depends on your particular policy language. If the commercial property policy includes the right coverage, the insurance company may still check to make sure the roof failure was caused by the storm and not the result of owner negligence (i.e. poor roof maintenance).
What if hail shatters a skylight and rain enters through the new opening causing damage inside the building? Flood insurance definitely will not cover the water damage. However, a good commercial property policy with hail coverage would most likely cover the broken skylight and the resulting water damage inside the building.
What if your building is destroyed by a storm that included hurricane-force winds, heavy rains, and a wave of water or “storm surge”? Many commercial property policies would cover the damage from the windstorm and possibly the rain (if wind broke through the building envelope), but would not cover the damage caused by the wave (directly, indirectly, or concurrently). It is sometimes impossible to prove whether a building was destroyed by wind, rain, storm surge or some combination of the three. A concurrent causation clause will likely come into play. This complicated situation has led to many lawsuits between insurers and policy-holding businesses after major hurricanes and tropical storms. The determination of coverage varies depending on the relevant policy language and the applicable legal precedents set in state and federal courts.
It is important for businesses to consider all the risks that water can pose, whether it comes from within like a burst pipe or from outside like a tidal wave. Flood insurance and commercial property insurance can complement each other to provide your business with the protection it needs and deserves. This area of risk management may seem complicated, but an agent can help you find the right policies at the right prices.
Other Enhanced Insurance articles related to Business Insurance:
Business and Commercial Insurance (Includes Video)
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