Commercial Magazine

Perilous Waters

Step up your game by mastering the basics of commercial flood insurance

By Ashley Pulver

The ongoing COVID-19 pandemic has made it even harder for commercial mortgage brokers to sustain and grow their businesses in an already highly competitive market. Brokers can outpace their competitors and retain new clients by gaining knowledge in areas where others are mostly uninformed. One ignored area of commercial real estate is flood insurance.

Even sophisticated commercial-property owners are often in the dark about flood insurance, but it is fundamentally important. Should your client experience a flood loss, they can feel secure if they have the proper flood-insurance coverage in place — and they could be in serious trouble if they don’t.

Before getting into the different flood-insurance options, it’s important to gain some understanding of flood risk and the insurance landscape. Flood zones are geographic areas with a heightened risk of flooding. Properties located within flood zones and designated as such by the National Flood Insurance Program (NFIP) are required to obtain flood insurance if their mortgage is from a federally regulated or insured lender.

Unfortunately, NFIP rate maps, which are the official maps that delineate the hazards in individual communities, are often out of date and may misrepresent a property’s true flood risk. Many property buyers don’t realize that flooding is prevalent not only in coastal areas but for inland areas as well. 

High risks

In fact, if NFIP flood zones were up to date, they would be about two times larger than they currently are, according to experts in topography. A national report from the First Street Foundation found that the number of U.S. homes and businesses at risk of severe flooding is far greater than previously realized.

The data revealed 5.9 million properties whose owners don’t realize they are in serious jeopardy of flooding. These properties have not received a Special Flood Hazard Area designation from the Federal Emergency Management Agency (FEMA) but nonetheless bear tremendous risk. An additional 8.7 million properties across the country also were found to face a substantial risk of flooding. The truth of the matter is that flooding can happen anywhere.

So, what’s the actual cost of flood damage and why is flood insurance so important? A 2020 analysis from the Association of State Floodplain Managers found that flooding has caused more than $155 billion in property damage since 2010, making it the leading cause of natural-disaster losses in the U.S.

Commercial mortgage brokers should encourage clients to protect their investments with the right flood-insurance coverage. This starts with determining which flood-insurance options are available.

Commercial-property insurance typically does not include flood coverage. Buying real estate is an enormous financial investment, so commercial mortgage brokers should encourage clients to protect their investments with the right flood-insurance coverage. This starts with determining which flood-insurance options are available.

Insurance 101

When it comes to getting flood insurance, there are typically two options available. The FEMA-administered National Flood Insurance Program is the option many property owners are aware of, since it often is the only one their insurance consultants are familiar with. Many consumers don’t know that they can purchase non-NFIP flood insurance through the private market, which often includes better coverage and pricing than its federal counterpart. 

It’s important to know the differences between the two. Whether a policy is written through the NFIP or through a reputable private flood-insurance provider, each can include coverage for the structure (the building itself) and will typically have options to cover the contents inside the building. There are usually numerous advantages, however, for buyers who choose the private market for their flood-insurance needs.

Consider some of the differences. First, private flood insurers may offer more competitive pricing as they assign rates using detailed information about a specific property. In contrast, FEMA uses generalized flood zones to make rate determinations that may unfairly overcharge for a property’s true risk. 

Private insurance can provide coverage that far exceeds the $500,000 real estate and personal-property limits available through the NFIP. Private policies often have options to provide business-income and extra-expense coverage, which is unavailable through the NFIP.

Additionally, private policies generally have a shorter waiting period than the NFIP, which requires a 30-day waiting period. Some private policies have waiting periods as short as 15 days. And obtaining a flood-insurance policy through the private market doesn’t require getting an elevation certificate — a document providing details about the property and its flood risk — which is often an inconvenient task that can cost thousands of dollars. This certificate is often required by the NFIP.

Transaction costs

You can see there are differences between what’s available through the NFIP and private flood-insurance providers. Next, it’s important to understand how this applies in the commercial real estate transaction process. 

As previously mentioned, buyers must purchase flood insurance for commercial properties in Special Flood Hazard Areas when funding is provided by a federally regulated or insured lender. The minimum requirement for such properties is usually at least $500,000 in coverage. Although this amount may meet the terms of the federal flood-insurance mandate, lenders can demand that additional coverage is in place before allowing a deal to go through. 

Since the purchase price for large commercial properties is often several million dollars, the lender may ask for much higher flood-insurance coverage. For example, $10 million may be required as a minimum when half as much would do.

Commercial mortgage brokers can work with a private flood-insurance specialist to help clearly explain to a lender why a $10 million limit might not be necessary, and that coverage of $2 million to $5 million may be more than adequate for the property in question. Just think of how happy the client will be when they realize the amount of money their mortgage broker helped them to save. 

Simplify problems 

A broker and a trusted private flood-insurance specialist can team up to overcome obstacles in real estate deals. In one example, the buyer of a commercial property that included 10 buildings needed a flood-insurance policy. Each building was required to have a certain amount of coverage, but the substantially lower limits available through the NFIP would have required the buyer to get 10 individual policies.

By purchasing a policy through the private insurance market, which offers much higher coverage limits, the client avoided the headache of acquiring and managing 10 separate policies. Instead, they had all 10 buildings covered under a single policy, saving both time and money.

In another instance, a commercial property with $500,000 in coverage had a premium cost of $1,000 through the private flood-insurance market. Had the mortgage broker not worked with a private flood-insurance specialist and known what was available, their client would have had to pay five times more for an NFIP premium that included less robust coverage.

Should a commercial property that’s rented and leased have to be shut down due to flood damage, private-market policies often have a loss-of-income provision. This provides policyholders with income replacement for a certain period of time if the business is damaged. 

 A mortgage broker who encourages property owners to have their insurance provider check the private flood-insurance market could prevent a serious setback in the event a claim must be filed. Private carriers often adjust claims more rapidly and are subject to state regulations, whereas a disagreement with the NFIP must be settled in federal court — an expensive proposition.

With only two major options available for flood insurance, it’s important that mortgage brokers understand the nuances of both and are able to articulate them to their clients. Brokers also should add a trusted private flood-insurance specialist to their rolodex. By doing so, clients will have a reliable expert and knowledgeable specialist at their disposal during transactions.  

Mortgage brokers are generally expected to inform their clients of certain catastrophic perils. Commercial mortgage brokers who are aware of these differences, are well-informed and understand that coverage exists beyond the NFIP can become heroes to their clients. Going above and beyond like this could be the key for mortgage brokers to earn referrals and repeat business. ●


  • Ashley Pulver

    Ashley Pulver is co-founder of INX Insurance Services LLC, which administers works with the nation’s top private flood insurers to provide agents and their policyholders with comprehensive flood-insurance coverage and rates that rival the National Flood Insurance Program.

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