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

But they do. And that makes it paramount for both public andcorporate risk managers to understand some critical aspects ofavailable safeguards.

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

o The first and worst of these was caused by a break in the oldSouth Fork Dam--at the site of the South Fork Fishing and HuntingClub, whose membership roster listed the likes of Andrew Carnegieand Andrew Mellon. The dead of 1889 numbered 2,209, and propertydamage 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 areported $45 million in property damage. Melting of deep snow andice on the surrounding hillsides along with heavy rain caused therivers surrounding Johnstown to rise rapidly. To this day, the highwater mark at a downtown municipal building is etched at 14feet.

o The third flood--July 20, 1977--was precipitated when a lineof thunderstorms stalled above the city. Johnstown lies at thebottom of a bowl of hillsides, and cascading rainfall measured at11.82 inches in 10 hours ultimately caused several dams to burstand sewers to overflow. The death toll climbed to 85 and propertydamage was estimated at $300 million.

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

Most of us realize that coverage provided or backed by theNational Flood Insurance Program is capped at $500,000 percommercial building and $500,000 for the property within each ofthose commercial structures. Corporations with multiple buildingson one site therefore could buy this limit on each individualstructure.

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

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

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

o There is a 35-day waiting period after a policy is purchasedbefore it becomes effective--instituted for those who tend to hedgetheir bets and not spend premium dollars until the storm clouds aregathering. The wait is waived under certain circumstances, such aswith new building purchases or refinancing.

The predictions for another heavy storm season should be enoughincentive for those businesses not required by a lender to buyflood coverage to fill out a flood insurance application soonerrather than later.

The lack of business-income or extra-expense provisions throughthe NFIP is critical for most commercial insureds. Althoughslow-rising flood waters may not necessarily sweep a building awayor even damage it structurally, cleanup typically is extensive andcan result in a long down time.

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

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

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

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

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

While it's true that disaster assistance may be available tosome entities that suffer flood damage, there are limitations. Onerestriction is that businesses receiving disaster assistance fromthe Small Business Administration after a flood must maintain floodinsurance until the SBA loan is paid off. If NFIP coverage is notmaintained and a second flood strikes the property, the owner willbe denied federal disaster assistance.

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

The Disaster Relief Act of 1974 and its amendments in 2000, infact, warn that federal assistance that might otherwise beavailable for public or private nonprofit facilities located inspecial flood-hazard areas will be reduced if the facilities arenot covered by flood insurance at the time of the flood.

The reduction amounts to the value of the facility damaged byflooding, or the maximum amount of insurance proceeds that wouldhave been payable had NFIP insurance been provided.

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

Much of the economic decline of cities like Johnstown--and nowNew Orleans and neighboring municipalities--are and will be blamedon these catastrophes.

While it's true that insurance isn't the answer to everyexposure, some of that decline may be averted with awell-thought-out risk management plan that includes adequate floodinsurance.

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