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coverage concerns WATER DAMAGE COVERAGE AND LIMITATIONS Knowledge minimizes claim problems By Roy C. McCormick
In April, many Eastern states suffered severe property damage when heavy rain and storms caused river flooding. These events closely followed similar countrywide torrential rains and flooding in March. Concerns soon surfaced regarding the extent of coverage for flooding and other kinds of water damage to dwelling property and commercial buildings and their contents. Claim experience points out that there is a continuing need to help insureds understand water loss coverage and limitations under basic property insurance. Those who advise insureds and arrange their insurance protection should check the widely used personal and commercial property insurance forms that focus on water damage—automobile policies, homeowners and businessowners policies, and scheduled property insurance provisions—because they are basic to the insurance programs of the vast majority of insureds. Auto policies The personal auto policy (PAP) provides coverage for flood damage under an optional but widely included coverage. Popularly known as “comprehensive coverage,” it also is identified as other-than-collision coverage in many personal auto policies. Loss or damage from the flood peril is also covered in commercial auto policies under comprehensive or specified causes of loss coverage. Personal experience demonstrated to me the importance of “comprehensive coverage.” Torrential rains inundated our apartment’s garage area and flooded our cars to seat level. Those of us who carried comprehensive coverage were most grateful. Homeowners policies Homeowners policies provide clear-cut coverage for specific kinds of water damage, as well as exclusions that reasonably limit the scope of coverage. Personal property coverage (C) does not provide coverage under the special form (3) for water damage of any kind. Coverage C insures for specific named perils, none of which relates to water damage. Note, however, that if a portion of a roof were to be torn off by a tornado or other windstorm, rain damage to interior personal property would be covered. Dwellings and related structures are covered under Form 3 for all perils except those specifically excluded or limited, including water damage. Plumbing leaks within the walls of a structure can cause much insured damage and are a legitimate concern for underwriters when it comes to older dwellings. Coverage includes the expense of tearing out and replacing any part of a covered structure when it is necessary to repair the plumbing system or appliance that has broken or is leaking. Water or steam must actually have damaged the property that is to be repaired or replaced. Replacement of the offending pipe or appliance is not covered. Flood damage to structures and their unscheduled contents is not covered under basic insurance protection. The general gist of the pertinent exclusion—referring to those in the homeowners special policy and the businessowners policy as examples—is that there is no coverage for damage caused by: flood, surface water, tides, tidal waves, overflow of a body of water, or spray from any of these, all whether driven by wind or not. Mudslide and mudflow are specifically excluded in some forms for clarification, although they are otherwise considered within the scope of the overall exclusion. Flood insurance Flood insurance under the National Flood Insurance Program (NFIP) picks up the exposure by covering any direct physical damage to covered property that is caused by flooding. “Flood” is defined in the NFIP as a general and temporary inundation of normally dry land from the overflow of inland or tidal waters, rapid accumulation or runoff of surface waters (generally created by heavy rains), mudflows or mudslides, or waters due to the collapse or subsidence of shores. The collapse or subsidence—usually identified as erosion—must be due to the action of water for coverage to be applicable. The adoption of floodplain management regulations in flood-prone communities has resulted in greater numbers of areas across the country qualifying for insurance under the NFIP. Cities and counties have established and are overseeing construction requirements and building priorities calculated to reduce future flood risks. The scheduling of described items of valuable personal property may be arranged to include the flood peril, regardless of whether the geographic areas in which they are located have been certified under the National Flood Insurance Program. Examples of commercial property frequently scheduled are contractor’s equipment, livestock, and property to which transportation policies are adaptable. With regard to personal insurance, homeowners insureds may supplement their protection with insurance for especially valuable classes or types of personal property on a schedule basis. Subject to a reasonable number of exclusions, the protection clearly covers damage by surface water and flooding. Check the “special limits” applicable to Coverage C in the homeowners form and note the modest insurance limits and perils covered with respect to property that should be considered for scheduling for its full value with flood coverage provided. Jewelry, furs, stamp and coin collections, and silverware are among the kinds of personal property most frequently scheduled. Further, fine arts are especially vulnerable to the surface water risk. Antique furniture, and especially antique oriental rugs, are frequently displayed on first-floor levels and thus are susceptible to water damage. Coverage under a scheduled personal property endorsement to a homeowners policy or under a personal articles floater policy must be based on a bill of sale or a recent appraisal. A proper basis for loss adjustment is thereby established. Sprinkler leakage Fire codes applicable to the construction of large commercial and residential buildings mandate the installation of sprinkler systems. Insurance agents and brokers have effectively encouraged the inclusion of sprinkler systems in many smaller store, office, and warehouse buildings. They protect lives, minimize property loss from fire, and affect insurance rates and acceptability. An insured will appreciate learning that property insurance can cover damage to building and contents caused by sprinkler leakage, and also the cost to tear out any part of the building in order to repair or replace the part of the system that is causing leakage. The insured must properly maintain the system and give notice to the insurer of any suspension or impairment of the system. Tax benefit Families who do not carry flood insurance will be grateful to their homeowners insurance provider for a reminder that uninsured flood damage is tax deductible. Loss to uninsured commercial property is deductible as an expense. The March and April rainstorms and floods hit both rural and urban property in areas that have rarely experienced such problems. Homes in outlying sections and stores fronting on streets of towns have dealt with unprecedented damage from water and mud. The value of flood insurance and its need, particularly where rivers are nearby, is evident. * The author |
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