Protect & Defend columnist Ed Branam, DVM, is the veterinary and animal services program manager at Safehold Special Risk Inc. A 1977 graduate of the Michigan State University College of Veterinary Medicine, Dr. Branam has worked in the insurance industry for the past 20 years. He is a former Sacramento, California, veterinarian and a former veterinary affairs manager with Hill’s Pet Nutrition.Read Articles Written by Ed Branam
Insurance companies estimate potential catastrophe-related losses with greater accuracy today because of improvements in modeling software. These forecasts have driven insurers to pay more attention to locations where losses from disasters such as earthquakes, floods, hurricanes and tornadoes can reach critical levels.
The result of this enhanced scrutiny is that most insurance policies exclude the perils of earth movement and floods. The exclusionary language and extent of coverage provided in standard property and liability policies can vary significantly, often to the detriment of the policyholder.
In the last two years alone, heavy rains have inundated wide stretches of communities — from California, Louisiana, Maryland and Missouri to Oklahoma, Texas, Utah and West Virginia — leading to tens of billions of dollars in damage. Each event represents a stark reminder of the long-term destructive effects that floodwaters can have on our personal and business lives.
Across many parts of the United States, unrestrained property development in flood-prone areas is accelerating faster than flood-mitigation efforts. One can anticipate that as new veterinary facilities sprout up to service these new communities, more practices will experience the costly toll of flooding.
Residential properties are frequently the most publicized victims of floods. However, for owners and managers of veterinary facilities, the damage can be just as devastating. Flooding can result in catastrophic, out-of-pocket expenses because standard commercial property insurance policies are not usually structured to cover the resulting damage associated with the peril.
Furthermore, the majority of veterinary business owners purchase flood coverage to satisfy lender requirements only. Absent specific flood coverage, their building, tenants’ improvements and betterments (TIBs) as well as business or personal property (contents) losses are not typically covered.
Here are a number of flood-related challenges that veterinary businesses face and my recommendations to help mitigate the financial impact to your practice.
1. Altered Flood Zones
Changes to flood zones during the policy year can create an underinsured situation for a veterinary practice. The financial impact typically surfaces in two areas:
- Reduced flood coverage because of inadequate coverage limits.
- Increased deductibles in high-hazard flood areas.
Recommendation: Know your flood zoning and discuss any new or anticipated zoning changes with your insurance agent at each policy renewal.
2. What Constitutes a Flood?
A broad definition of “flood” sometimes allows certain non-flood events to be classified as one, potentially reducing coverage or increasing the applicable policy deductible. For example, many standard off-the-shelf policies may contain some or all of the following broad definitions:
- Surface or underground water.
- Waves, tides, tidal waves, tsunamis, the overflow of any body of water, a body of water’s spray.
- A mudslide or mudflow.
- The release of water impounded by a dam.
- Water or sewage that backs up through sewers, drains or sumps.
The broad definitions mean that many types of water damage, whether naturally occurring or due to man-made or other artificial causes, qualify as a flood and are likely excluded from your policy.
Recommendation: Read your policy closely alongside your insurance agent. Policy exclusions that utilize a narrow definition of flood, such as “the rising and overflowing of a body of water onto normally dry land,” can have a significant positive financial impact on your business.
3. What Is at Stake?
Proper risk quantification and adjustments for assets exposed to a flood is an essential aspect of a risk-mitigation plan. When assessing how much flood insurance your business needs, first develop a firm understanding of the potential damage from a flood. This may sound simplistic, but many practice owners do not know the cost to replace all their assets in the event of a flood.
Here are additional questions to consider:
- If your business is in a leased property, who is responsible for damage to the building or to tenant improvements and betterments, such as floors, walls and cabinets, in the event of water damage?
- What if the tenant improvements and betterments were in place when you moved into the space? Who is responsible for the cost of replacement or repair? Knowing the answer to these questions is the first step in determining the amount of coverage needed.
Recommendation: Take time to quantify your exposure and the cost to replace business components that you own or have a contractual responsibility to replace. Then get an adequate amount of flood insurance.
4. Other Considerations
Unlike property and liability insurance policies, flood insurance for buildings and their contents are typically provided in two or more policies. For the building, primary flood insurance normally is purchased through the National Flood Insurance Program and covers up to the first $500,000 of building value. Additional coverage for higher-value buildings can be obtained through private insurers.
Recommendation: Your insurance agent should be able to provide alternative outlets for primary and excess building flood insurance, if necessary.
When it comes to TIBs and a building’s contents, some insurance companies include the flood peril as part of property and liability policies.
Recommendation: Consider such a policy. Typically, you will find better coverage of flood and water damage at a significantly lower premium with this type of policy. If such coverage is not included, shop for an individual policy.
Finally, in many instances after a flood, your greatest exposure is the loss of income due to a business interruption. The practice may not reopen for a significant amount of time, and even when it does, revenue likely will not return to previous levels until a number of months have passed. For most veterinary practices, ongoing expenses such as lease or mortgage payments, utilities, insurance premiums, taxes and salaries could quickly bankrupt or shut down the business.
- Look for loss-of-income coverage for “actual loss sustained.” Many policies cap the loss-of-income coverage, but this likely will be insufficient for your business.
- Review how long your loss-of-income coverage is in place. Standard policies typically provide 30 days to 24 months of coverage. Considering that floods typically damage wide areas of residential and commercial property, an extended timeframe might be needed for repairs, particularly if architectural or engineering assistance, municipality approvals, or contractors are needed.
- When you reopen, patient visits and revenue likely will be significantly less. An extended period of indemnity coverage is designed to address the income gap. Typical insurance policies provide from 30 to 365 days of coverage. The longer the coverage period, the better, especially if there is no maximum limit.
Don’t wait until a flood occurs before you figure out how to respond. Having a detailed and tested plan is essential when it comes to limiting the potential damage to your business and the disruption to your patients’ health care.