Fine Print in the Policy
If you owned and operated a small business located in a desert, would you purchase flood insurance?
Most people would say no and might learn, the hard way, that it is a trick question. Residents of Valley Park, Missouri declined to purchase flood insurance after FEMA, the U.S. Federal Emergency Management Agency, determined that the community is not located in a flood plain, such that the purchase of flood insurance is not mandatory. When their properties were recently submerged in flood waters three feet deep, they learned the hard way that in any given year, 20 per cent of the properties that flood are not actually located in flood plains and are experiencing flood for the first time. Homeowner’s insurance typically excludes flood coverage, which is why FEMA recommends that every homeowner have flood insurance.
There is an additional consideration that confounds many business owners – that of contingent business interruption coverage. In connection with developing teaching materials to support Prepare for the Worst, Plan for the Best: Disaster Preparedness and Recovery, I referenced a case study about a small business that makes sunscreens from organic ingredients. As the business is located in an area away from known hazards, the business believed it was relatively safe from weather-related risks. It discovered its vulnerability when it learned that the supplier of its principal ingredient was under eight feet of water in Cedar Rapids, Iowa following the epic flooding in that community. It could have mitigated its risks in one of two ways: diversify the supplier base so it was not entirely dependent on a single supplier of a key ingredient. Or, if the ingredient was unique and unavailable elsewhere, it could have added another form of insurance coverage to its policy.
Contingent business interruption insurance indemnifies the business against losses caused by disruptions to key suppliers, so, in theory, the sunscreen producer (located in the southwestern part of the United States) could have been paid for claims arising from the floods in Cedar Rapids, Iowa. But – here is the less obvious issue – contingent business interruption insurance is only valid against an underlying cover. In other words, the sunscreen producer would have needed flood insurance to extend the claim of losses under a contingent business cover to its supplier over 1,000 miles away. Would a business located in a desert climate have thought to purchase flood insurance? Probably not. So it is important to seek advice when considering commercial insurance coverage.
