On Sept. 9, 2013, along Colorado's heavily populated Front Range from Fort Collins to Colorado Springs, a severe cold front brought a deluge of nonstop rain for five days. Eight people lost their lives during the subsequent flooding, businesses were destroyed and two major thoroughfares into remote mountain towns were washed away by what experts titled the “100-Year Colorado Flood.”

The estimated cost to date of Colorado's 100-year flood is at $2.5 billion. However, many businesses in Colorado still don't see the need to insure against a flood, thinking their property insurance policy will cover the damage.

Denver business owners and residents especially were reluctant to purchase a rider for flood insurance, with policies actually dropping by 3.1% in 2013. According to the Federal Emergency Management Agency, only 22,000 homes and businesses in Colorado have flood insurance.

Why don't more companies/property owners participate? Out of the state's 64 counties, some opted out of the program, citing cumbersome government regulations and unnecessary cost to the county to design and enforce those regulations.

Educating about NFIP

The National Flood Insurance Program (NFIP) is a federally subsidized program available to any property owner, whether or not the building is in a floodplain. Insurance is sold through a private insurance agent who wants to sell it in a community who has joined the program. NFIP is based on an agreement between local communities and the federal government which states that if a community will implement measures to reduce future flood risks to new construction or substantial re-construction, the federal government will make flood insurance available within the community as financial protection against flood losses which do occur.

By educating clients about NFIP, clients will better understand what it does and does not cover. For instance, the NFIP provides coverage for the furnace, hot water heater and washer/dryer in the basement as well as drywall. It does not provide coverage for the finished drywall, carpet or any other contents in the basement, including personal items like office furniture and files.

Hurricane Katrina wreaked havoc on NFIP, with an $18 billion price tag. More recently, the estimated number of new claims for Super Storm Sandy dumped an additional $7 billion in debt on the government program.

As a result, some policyholders who were paying hundreds of dollars for flood insurance now had to pay upwards of $20,000 under the federal government's Biggert Waters Flood Insurance Reform Act of 2012 (BW-12), put in place as a result of these natural disasters.

Costs under control

The Homeowners Flood Affordability Act of 2014 was later enacted as a direct result of the Colorado 100-Year Flood and the flooding that occurred along the eastern seaboard.

The 2014 legislation is designed to alleviate the immediate impact of BW-12 and help folks maintain a manageable premium after being recatogorized into a high-risk zone. Zoning laws are also getting redrawn due to higher-than-average flood incidents over the past few years.

After a calamity, these folks will be grandfathered into the rezoned high-risk area, limiting the skyrocketing cost of being rezoned into the more expensive zone. Homes and businesses along the coast are now mandated to have flood insurance, with an average cost of $1,000 to $3,000 per year.

Agents may advise clients who incur property damage due to flooding to either hold off or pay for some damages out-of-pocket. A policyholder may be penalized for taking out too high or one too many claims resulting in the insurance carrier dropping a client for high liability.

Agents may recommend clients take out a preferred risk policy for a low- to moderate-risk zone that will soon be categorized as high risk with the ability to renew the plan at a lowered rate. As part of the restructuring, however, grandfathering is gradually being phased out. Insurers are also limiting coverage reach, or excluding certain items from the list.

A disaster recovery plan is critical for mitigating any catastrophic loss. In the event of a flood, a company should know where to find important files, contact employees, evaluate the status of hazardous material, create a preapproved vendor list so a company can mitigate the loss to its operations and reduce the downtime caused by a catastrophic event.

Looking forward

Almost a year later, many of the towns impacted by the Great Colorado Flood are still cleaning up and fixing up their lives and livelihoods. Some have lost their entire life savings and others just cannot afford to rebuild.

The United States Geological Survey (USGA) uses a one-percent annual exceedance probability (AEP) flood as the basis for the National Flood Insurance Program.

For agents and brokers advising policy holders who are weighing the risk of not having a flood policy, it is critical to site the USGS statistics that shows a home in the 1-percent AEP (100-year) floodplain has a 26-percent chance of being flooded at least once during those 30 years.”

For roughly $460 a year, a business or homeowner can purchase a flood policy for a home/building worth $250,000 if it is not located in a flood plain. However, a local government or municipality must be registered in the federal-flood program for residents to participate.

It is good business for agents and brokers to educate their clients about the following resources so they are prepared for Mother Nature's fury in the future:

Establish a Risk Management Plan
Have an Emergency Employee Contact List
Do not use basements to store critical equipment or materials.
Establish vendor contracts for restoration of critical equipment and machinery, hot sites, etc. Identify vendors who can provide dehumidification and cleaning of buildings and materials.
Take inventory of unsecured outside equipment and materials. Establish methods and actions to secure these when needed.
Plan for the handling and securing of hazardous materials, such as gas cylinders and flammable liquid drums.
Provide for emergency communication equipment.
Provide generators or other means of emergency power, and test unit(s) periodically.
Provide flood protection for fire sprinkler pump houses.

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