The vast majority of commercial property policies list flood as an excluded peril. This exclusion can be confusing if you aren't sure what the term flood actually means in an insurance policy.
Most commercial property policies purchased by small business owners contain a flood exclusion like the one found in the standard ISO property form. In the ISO form, flood is addressed in a broad exclusion entitled Water.
When someone in the insurance industry refers to the "flood exclusion", they usually mean the entire Water exclusion.
The Water exclusion applies to the following:
- Flood, surface water, waves (including tidal wave and tsunami), tides, tidal water, overflow of any body of water, or spray from any of these. All of the above are excluded whether or not the water is driven by wind (including storm surge).
The word flood isn't defined. Thus, the ordinary definition of the word generally applies. Flood typically means a general and temporary inundation by water of land that is ordinarily dry. Flood includes flash flood.
Insurers and the courts haven't always agreed on the meaning of surface water. Generally, the term refers to water, such as rainwater, which is not part of a body of water (like a lake or stream) but remains on the surface of the ground. Once water has flowed underground or into a body of water, it no longer qualifies as surface water. Surface water usually appears after a heavy rain or after snow has melted.
The Water exclusion applies to water that is driven by wind, including storm surge. Storm surge occurs when high winds blow water from an ocean or other body of water onto land. Storm surge often results in flooding.
The term mudslide typically means a large amount of mud that is moving quickly down the side of a hill. The term mudflow means mud that is in motion. FEMA defines it as a river of liquid and flowing mud on the surfaces of normally dry land areas, as when earth is carried by a current of water.
- Water that backs up or overflows or is otherwise discharged from a sewer, drain, sump, sump pump or related equipment.
Sewer or drain backup is excluded under the standard ISO policy. However, some policies do not contain this exclusion. Others exclude sewer backup but then add back some coverage, subject to a sublimit, such as $10,000 or $25,000.
- Water under the ground surface pressing on, or flowing or seeping through:
- Foundations, walls, floors or paved surfaces;
- Basements, whether paved or not; or
- Doors, windows or other openings.
When water flows underground, it may seep into a building through the foundation, a basement or openings like doors and windows. Damage caused by this type of seepage is excluded.
- Material carried by water or mud as described above.
Water and mud often carry debris. Property damage caused by debris, such as rocks carried by mudflow, is excluded.
Natural or Made-made Events
The Water exclusion applies whether the water or mud is caused by a natural event or a man-made one (like a dam or levee failure).
Coverage Afforded by Exceptions
The standard Water exclusion contains an exception for ensuing loss caused by fire, explosion or sprinkler leakage. That is, if flood, surface water, mudflow or any other type of water listed above causes fire, explosion or sprinkler leakage, the damage caused by the fire, explosion or sprinkler leakage is covered.
For example, suppose that water seeping into the basement of a commercial building causes a fire in the electrical panel. The fire spreads to the first floor of the building and damages a paneled wall and a carpet. While damage caused by the seeping water is excluded, the damage caused by the fire should be covered.
Anti-concurrent Causation Exclusion
In most commercial property policies, the Water exclusion is subject to anti-concurrent causation wording. This wording applies when a loss is caused by both flood and a second peril, and the second peril is covered. Even though the second peril is covered, the loss is excluded in its entirely because flood is involved.
For example, suppose that a heavy rainstorm brings high winds. Rainwater accumulates, causing a creek to overflow. Flooding and high winds damage the entrance to a building. The damage to the building is excluded because flood was one of the causes. Even though wind, a covered peril, was also involved in the loss, the damage is excluded.
Flood Insurance
Flood is excluded under standard property policies because it can cause catastrophic losses. This means it can affect large numbers of properties over a large geographic area. You can protect yourself against damage by flood by purchasing flood insurance through the federal flood program.