In the aftermath of disasters such as floods and earthquakes, onlookers often shake their heads. They're mystified that people would return again and again to resume their lives at such scenes of destruction.

But they do. And that makes it paramount for both public and corporate risk managers to understand some critical aspects of available safeguards.

Having lived and worked in Johnstown, Pa., for a number of years, I have had some experience with flood exposures and insurance. Johnstown, once a thriving metropolis, has the dubious distinction of enduring three floods--in 1889, 1936 and 1977.

o The first and worst of these was caused by a break in the old South Fork Dam--at the site of the South Fork Fishing and Hunting Club, whose membership roster listed the likes of Andrew Carnegie and Andrew Mellon. The dead of 1889 numbered 2,209, and property damage was listed at $17 million.

o St. Patrick's Day in 1936 gave witness to the second flood, which is charged with the deaths of about two dozen people and a reported $45 million in property damage. Melting of deep snow and ice on the surrounding hillsides along with heavy rain caused the rivers surrounding Johnstown to rise rapidly. To this day, the high water mark at a downtown municipal building is etched at 14 feet.

o The third flood--July 20, 1977--was precipitated when a line of thunderstorms stalled above the city. Johnstown lies at the bottom of a bowl of hillsides, and cascading rainfall measured at 11.82 inches in 10 hours ultimately caused several dams to burst and sewers to overflow. The death toll climbed to 85 and property damage was estimated at $300 million.

The irony of the 1977 flood--if irony can be invoked on such a tragedy--is that after the 1936 flood, the U.S. Army Corps of Engineers had constructed flood walls and carved channels in the rivers to prevent future flooding, but nature cannot necessarily be tamed.

Most of us realize that coverage provided or backed by the National Flood Insurance Program is capped at $500,000 per commercial building and $500,000 for the property within each of those commercial structures. Corporations with multiple buildings on one site therefore could buy this limit on each individual structure.

There are several points to keep in mind when considering NFIP coverage, among them:

o NFIP policies do not offer any business-income coverage.

o Excess flood or difference-in-conditions coverage may be needed above the NFIP policy limits.

o There is a 35-day waiting period after a policy is purchased before it becomes effective--instituted for those who tend to hedge their bets and not spend premium dollars until the storm clouds are gathering. The wait is waived under certain circumstances, such as with new building purchases or refinancing.

The predictions for another heavy storm season should be enough incentive for those businesses not required by a lender to buy flood coverage to fill out a flood insurance application sooner rather than later.

The lack of business-income or extra-expense provisions through the NFIP is critical for most commercial insureds. Although slow-rising flood waters may not necessarily sweep a building away or even damage it structurally, cleanup typically is extensive and can result in a long down time.

Standard commercial property and business-income policies do not include flood as a covered cause of loss. This means that the business-income coverage will not be triggered by a flood.

While working in Johnstown, I arranged a number of excess flood or DIC policies through either the standard or surplus lines market--primarily to provide business-income insurance to commercial accounts.

Even though insurers don't like to see high-water marks on the buildings they're asked to insure, it's important to at least look for this coverage. Risk managers then can do a cost-benefit analysis to compare the price of coverage against the specter of retaining this potentially extensive business-income exposure.

When arranging DIC coverage, the carrier may insist that the maximum NFIP limit also is purchased, and set the deductible at that amount. That's a reasonable request, but it's important to clearly state on the DIC policy that the NFIP limits are to cover the deductible and do not apply as "other insurance," if that is the intent.

Failure to clearly state how the two types of coverage are intended to interact can cause problems after the loss. It's what is written on the insurance policy and not what's in the mind of the risk manager that counts when a loss actually occurs.

While it's true that disaster assistance may be available to some entities that suffer flood damage, there are limitations. One restriction is that businesses receiving disaster assistance from the Small Business Administration after a flood must maintain flood insurance until the SBA loan is paid off. If NFIP coverage is not maintained and a second flood strikes the property, the owner will be denied federal disaster assistance.

Moreover, public entities and private not-for-profit organizations may be denied disaster relief assistance if they were not covered by flood insurance at the time of loss.

The Disaster Relief Act of 1974 and its amendments in 2000, in fact, warn that federal assistance that might otherwise be available for public or private nonprofit facilities located in special flood-hazard areas will be reduced if the facilities are not covered by flood insurance at the time of the flood.

The reduction amounts to the value of the facility damaged by flooding, or the maximum amount of insurance proceeds that would have been payable had NFIP insurance been provided.

Since the NFIP offers up to $500,000 for a building and $500,000 for contents, the reduction could amount to $1 million per building--a hefty penalty to absorb after a flood.

Much of the economic decline of cities like Johnstown--and now New Orleans and neighboring municipalities--are and will be blamed on these catastrophes.

While it's true that insurance isn't the answer to every exposure, some of that decline may be averted with a well-thought-out risk management plan that includes adequate flood insurance.

As has been shown by the history of cities like Johnstown, floods are devastating to not only the structures they damage and lives they take, but to the economic lifeblood of a community.

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