Oh the Places We Swim

While the mental picture created by the term "flood" typically involves swamped cars, oceans replacing fields and boats rescuing folks off rooftops, there is possibly a more insidious type of flooding. I refer, of course, to the once-dry basement reborn as an indoor swimming hole without the intent or approval of the building owner.

To add insult to injury for the typical insured, NFIP and insurance forms do not consider a flooded basement to be a "flood." You may think 4 feet of water in your basement is a flood, but unless it is part of a bigger "flood" covering multiple locations and at least two acres of land, even those in actual possession of a flood policy are going to be out of luck.

So where do they turn in the absence of NFIP coverage? To their homeowners' form, of course. And yet, instead of a "Come on in, the water's fine," they are likely going to find a "Sorry, we're closed." On-premises water damage (with a few exceptions, such as water which accidentally escapes from a "plumbing, heating, air conditioning or automatic fire protective sprinkler system or household appliance") is subject to an ISO homeowners form general exclusion which reads as follows (HO 00 03 10 00, as modified by HO 16 10 01 09):

3. Water

This means:

a. Flood, surface water, waves, including tidal wave and tsunami, tides, tidal water, overflow of any body of water, or spray from any of these, all whether or not driven by wind, including storm surge;

b. Water which:

(1) Backs up through sewers or drains; or

(2) Overflows or is otherwise discharged from a sump, sump pump or related equipment;

c. Water below the surface of the ground, including water which exerts pressure on, or seeps, leaks or flows through a building, sidewalk, driveway, patio, foundation, swimming pool or other structure; or

d. Waterborne material carried or otherwise moved by any of the water referred to in A.3.a. through A.3.c. of this Exclusion.

This Exclusion (A.3.) applies regardless of whether any of the above, in A.3.a. through A.3.d., is caused by an act of nature or is otherwise caused.

This Exclusion (A.3.) applies to, but is not limited to, escape, overflow or discharge, for any reason, of water or waterborne material from a dam, levee, seawall or any other boundary or containment system.

However, direct loss by fire, explosion or theft resulting from any of the above, in A.3.a. through A.3.d., is covered.

All other provisions of this policy apply.

Briefly, "a." is meant to exclude what is intended to be covered by an NFIP policy, and "c." is the water version of the "wear, tear, inherent vice, maintenance, etc." exclusions. So if "a." is the concern, the homeowner needs a flood policy. If "c." is the concern, they need to look at regular maintenance, sealing and other construction problem/fixes.

Which brings our flooded basement issue back to "b." And herein lies the classic risk management, insurance coverage and professional advice sweet spot where all true agents should live long and prosper.

Related: Read Chris Amhrein's July article "Volcano erupts with opportunities."

Interestingly enough, "b." contains within itself the clear risk management solution. If you have a basement subject to water incursion for whatever reasons, the best way to eliminate or minimize potential damages is to set up an automatic procedure to remove such water upon arrival–namely, a sump pump or related equipment. This fact is so well recognized that many jurisdictions where such water threats exist mandate such equipment in construction and zoning regulations. We live in such a neighborhood, and if anything, the built-in process is so automatic, several of our "not from this area" new neighbors have inquired over time if I have any idea the source of that strange humming they hear every so often. ("I'd think it was my heater, but not in the summer. It kind of reminds me of that end of dryer cycle, where it cuts on and off a few times to keep the clothes from wrinkling as they cool down?" "Um, you have a sump pump in your basement, right?" "We do?" And we expect these people to read their insurance policies…)

With a solid risk management solution (sump pump) in place, the logical next step is to have a backup plan for when the primary solution fails, likely for mechanical reasons but possibly due to a power outage resulting from the water or the storm "what brung it." Since paragraph "b." of the exclusion clearly eliminates any possibility of coverage for the failed pump unless due to fire, explosion or theft, this leads the astute practitioner to the next obvious question–is there a solution to the exclusion?

In our situation, it turns out ISO has an endorsement specifically addressing paragraph "b." It's the HO 04 95 01 09, Water Back-Up and Sump Discharge of Overflow, and the key wording is as follows:

We insure, up to $5,000, for direct physical loss, not caused by the negligence of an "insured", to property covered under Section I caused by water,
or waterborne material, which:

1. Backs up through sewers or drains; or 2. Overflows or is discharged from a:

a. Sump, sump pump; or

b. Related equipment;

even if such overflow or discharge results from mechanical breakdown. This coverage does not apply to direct physical loss of the sump pump, or related equipment, which is caused by mechanical breakdown.

It also restates the entire water damage exclusion to make clear two things: first, coverage now exists for what was previously excluded by "b."; and second, that there is still no coverage if the water being discussed is the direct or indirect result of flood. In other words, the insured still needs an NFIP policy.

While the endorsement is a wonderful thing for flooded basements everywhere, there is one final key issue to consider. Following the good news that the endorsement now provides coverage, is the dark cloud with that silver lining going to be the limit of $5,000? I don't know what you have in your basement, but a washer, dryer and furnace alone could bump up against the $5,000, and we haven't even discussed storage, toys, games, home theater or, dare I dream, a fully equipped "man cave." Check with your carriers to see what higher amounts are available, and whether they have their own versions of the endorsement that may either delight or depress you. Just one more reason why folks need the advice and counsel of an astute agent.

Take a lesson from the Talking Heads. While everyone else acts like the only real homeowner risk is "burning down the house," you can be choosing the best spot for leaping into those refreshing cool depths of true service to clients.

Hopefully it won't be from the top of the washing machine.