Flooding is a huge issue for the United States, with billions in losses annually and many people uninsured because of lack of availability, unaffordable coverage, or lack of understanding as to what policies provide what coverage.
NFIP has been the go-to for flood insurance since 1968. There have been struggles over the years and there are flaws in the system, including mapping and the ability to charge actuarially correct premiums for the risk exposure. Changes have been made, and the industry has started providing some policies. ISO has developed both commercial and personal flood programs. Some private carriers are developing flood policies based on the standard NFIP provisions. Another alternative is parametric policies.
Parametric policies are often used for catastrophic losses and offer immediate coverage to the insured based on a specific trigger. Once that trigger has been reached, funds are paid out, often immediately before proof of loss is sent to the insurer. There are no adjusters required to visit the loss location. Once an insured notifies the company that they have sustained a loss, funds are sent and the file is either audited later or the insured is required to provide proof of loss documents later. Jumpstart is a company providing parametric earthquake coverage. see Jumpstart Insurance Policy Analysis.
Recently a British parametric company FloodFlash has announced plans to begin providing parametric coverage in California, Texas, Louisiana, Florida, and Virginia for commercial properties. A sensor is installed that detects the water level at the premises. The insured selects the depth level that will trigger coverage; the minimum is eight inches. There is no deductible and any commercial property is eligible. The nature of the exposure will determine the rate, and $5,000 is the minimum amount of coverage available.
The policy begins with a brief cover letter indicating that the policy includes the policy, schedule, and any endorsements. Also included is the company's privacy policy and insureds are advised to check the documents carefully, as incorrect information could affect claim payment or administrative fees being incurred.
The policy has been drafted in such a way as to be easy for consumers to read and understand. The policy is broken into the following sections:
For ease of use our analysis will be broken into multiple sections; each section will link to the other sections. A copy of the policy may be found here.
After the table of contents, there is the following language:
A note on parametric insurance This is a parametric insurance policy based on measured flood events. When a flood reaches the trigger depth that you selected, you will be paid the lesser of the actual loss sustained and the payout as per your schedule.
To make sure this policy is right for you, you need to think about what you need before a flood happens. You might want to consider:
1. How much it might cost to repair the insured premises and / or its contents after a flood
2. How long your business could be interrupted for, and how much revenue might be lost as a result
3. Other flood insurance you might have. For example, your other insurance might have a deductible which you are responsible for, parts of the insured premises or business interruption costs might be excluded from coverage, or the level of coverage provided may be insufficient for your business
4. The level to which any equipment, contents, or other items are raised above the ground, and / or
5. Any flood defences or resilience measures you have installed at the property, like flood barriers, and to what flood depth they might protect you.
You may wish to discuss this with your insurance broker or a third-party surveyor.
Analysis
This information explains to the insured how the parametric policy works. It explains that once water reaches the insured's selected trigger depth, the insured is paid the lesser of the actual loss sustained and the payout as listed on the schedule. If an insured has selected a limit of $100,000 and only sustains $50,000 in damages from a covered event, then the insured will receive $50,000.
To ensure that this policy is the correct type of coverage for an insured, insureds are advised to consider a number of factors such as the potential cost of repairs after a flood, possible business interruption expenses, the existence of other flood insurance from other policies and deductibles, placement of equipment above ground level, and any prevention or mitigation efforts the insured has taken.
The insured is then advised to review the premises being covered, and the selected trigger depths and payout amounts, which are provided in the policy schedule.
Definitions for the terms in this document
The following terms have the same meanings throughout this policy.
Actual loss sustained: is the costs you incur to recover after a measured flood event and relating to your insured interest. Your actual loss sustained is not contingent upon physical damage to the insured premises but upon the occurrence of a measured flood event and shall be calculated as the sum of:
(a) any reasonable and necessary costs to repair or replace with like kind and quality, (b) the actual cash value at the time immediately prior to the occurrence of a measured flood event where there is no repair or replacement available and, (c) direct and indirect financial losses including costs consisting of
• loss prevention, • business continuity, • losses due to the interruption or suspension of your business, • increased supply chain and/or supply chain interruptions, • any expediting and extra expenses, including but not limited to, additional staff, extraordinary payroll expenses to continue the operation of the business but excluding pure market risks (including but not limited to decline in share or commodity prices, interest rate or currency fluctuations) and staff medical and counselling as a result of this event.
You shall be permitted to maintain other insurance, however, any recoveries you make from any and all other insurance contracts shall be deducted for the purposes of determining the actual loss sustained.
Cancellation date: means the date when a policy ends as requested by you prior to end of the insured period policy. This date cannot be in the past.
Endorsement: means a change to the terms of the policy.
Estimated actual loss sustained: is your good faith preliminary estimate of your actual loss sustained in the event notice.
Event notice: is a declaration made by you confirming the occurrence of a measured flood event and stating your estimated actual loss sustained.
Final payment: the total payment from us to you after the application of clauses 5.7, 5.8 and 5.9 herein.
Analysis
As with most insurance policies, certain terms are defined. In an effort to make the policy easy to understand the defined terms section includes some basic insurance terms as well as more policy specific terms. Actual loss sustained is defined as the cost incurred after a measured flood event relating to the insured's interest in the property. The actual loss sustained is not contingent on physical damage to the premises, but on the occurrence of a measured flood event. Measured flood event is a defined term and means a flood at the insured premises that meets or exceeds the given trigger depth and happens during the policy period but after the waiting period.
The calculation of actual loss sustained is the sum of the following: Reasonable and necessary costs to repair or replace with like kind and quality; The actual cash value at the time immediately before the loss when no repair or replacement of damaged property is available; Direct and indirect financial losses that include costs consisting of the following: Loss prevention, business continuity, losses due to interruption/suspension of the business, increased supply chain or supply chain interruptions, expediting and extra expenses.
Expediting and extra expenses include but are not limited to costs for extra staff, extra payroll to continue business operation but not pure market risks (including a decline in share/commodity prices, interest rates, currency fluctuations), and staff medical and counseling as a result of the event. All these factors are used to determine the amount of actual loss sustained when a flood event occurs.
The insured may maintain other flood policies, and in such case recoveries from those policies will be deducted from the amount of actual loss sustained paid out. This is in effect an other insurance clause that prevents an insured from profiting from his loss. This policy acts as excess coverage, in that if payment has been received from another insurance policy, this policy will only pay above what has already been received. For example, an insured has a FloodFlash policy for $100,000 and a separate flood policy for $100,000. The insured sustains a flood loss for $150,000. The insured will collect $100,000 from the other policy, and only $50,000 from the FloodFlash policy since the bulk of the loss was covered under the other policy.
Cancellation date: is when a policy ends as requested by the insured before the actual expiration date of the policy. A cancellation date may not be in the past.
Endorsement: is a defined term and means a change to the terms of the policy. Endorsements are common within the industry as a way to modify the policy and add, remove, or change certain coverages.
Estimated actual loss sustained: is defined as the insured's good faith initial estimate of damages sustained in the event. The actual amount of damages may be revised later, but a preliminary estimate is used to get the claim started.
Event notice: is defined as notice by the insured that confirms that a measured flood has occurred and that the insured suffered damages. The insured is to provide an estimate of the loss sustained.
Final payment: is defined as the total payment from the insurer to the insured after clauses 5.7, 5.8. and 5.9 have been applied. These three clauses detail what happens if the insured does not provide a proof of loss or supporting documents within the required time frame (5.7), if the payout is more or less than the loss sustained (5.8), or if the premium has not been received for the coverage and the insured is within the premium due date (5.9).
Flood: includes any case where land not normally covered by water becomes covered by water that reaches any external part of the walls of the insured premises. This includes flooding caused by:
• heavy rainfall, • a river overflowing or its banks being breached, • a dam overflowing or being breached, • tidal waters, • groundwater, • or any other source of naturally-occurring excess water (including any combination of the above factors).
However, flood does not include:
• flooding from any part of a sewerage system, unless caused by an increase in the volume of rainwater (including snow and other precipitation) entering or otherwise affecting the system, or • flooding caused by a burst water main.
(FloodFlash) sensor: means the flood water detector identified in the schedule, that we supply and install.
(FloodFlash) sensor fee: means the sum of money you need to pay us to rent the sensor.
Initial payment: means the money paid by us to you following a measured flood event and in accordance with 5.3 herein.
Insured interest: means your interest in all real and personal property at the insured premises, including but not limited to:
• property damage and personal property owned, used or intended for use by you, or hereafter constructed, erected, installed, or acquired including while in course of construction, erection, installation and assembly and, • business interruption including contingent business interruption.
Insured period: means the period of time shown in the schedule, including the first and last days.
Insured premises: means the property described in the schedule.
Loss payee: means the third party named by you and shown in the schedule who we will pay, rather than you, in the event of a measured flood event. This may be where the insured premises are subject to a mortgage or other security interest.
Measured flood event: means a flood that:
• happens at the insured premises, • meets or exceeds the trigger depth, and • happens during the insured period and after the waiting period.
Analysis
The definition of flood is different from both the NFIP forms and the ISO flood policy definitions. It is more specific than either and states that flood is when land not normally covered by water becomes covered by water and that water reaches any external part of the walls of the insured premises. Note that more is required than just the land being flooded; the water must touch the walls of the insured property. So if water intrudes onto the yard but does not touch the building, even if the basement floods as a result, that is not considered a flood.
Included in the definition of flood is flooding caused by heavy rainfall, a river or dam overflowing or being breached, tidal waters, groundwater, or any other source of naturally-occurring excess water, including a combination of the listed causes. It's important to note that the water must be naturally occurring.
Not included in the definition of flood is flooding from any part of a sewage system unless caused by an increase in the volume of rainwater; this includes snow and other precipitation, and the precipitation must enter or otherwise affect the system. This includes snowmelt. If an area had a significant amount of snow that melted due to unseasonably warm temperatures or heavy rains and that snow melt entered the sewage system, there would still be coverage. Flooding caused by a burst water main is also not considered flooding.
(FloodFlash) sensor is defined as the water detection device identified in the schedule that is supplied and installed by the company. This device measures the water level and sends a signal when the trigger depth has been reached.
Along with the sensor, (FloodFlash) sensor fee is the required fee the insured pays in order to use the sensor to record flood events.
Initial payment is defined as the money paid by the company to the insured following a measured flood event in accordance with 5.3 under the Making a claim section of the policy. Section 5.3 states that based on the event notice received by the company from the insured, an initial payment will be issued for the lesser of the estimated actual loss sustained and the payout amount.
Insurable interest is a key component of any insurance policy, and insured interest is defined as the insured's interest in all real and personal property at the insured premises. This includes but is not limited to property damage and personal property owned, used or intended for use by the insured. Property constructed, erected, installed or acquired by the insured, including property in the course of construction, erection, installation and assembly is also included. Lastly, business interruption including contingent business interruption is considered part of an insured's interest as well.
The policy period is defined as insured period which is the time shown in the schedule, including the first and last days.
The insured premises is defined as the property described in the schedule.
The definition of loss payee is the third party listed by the insured and shown in the schedule. The loss payee will receive payment in event of a loss instead of the insured. This is generally when the property is subject to a mortgage or other security interest of some sort.
The definition of measured flood event is key to coverage in this policy. It is defined as a flood that happens at the insured premises, meets or exceeds the required trigger depth, and happens during the insured period but after the waiting period. Waiting period is also a defined term and is the first fourteen days of a new policy. Without a Measured flood event, no payment will be made. The Measured flood event is the covered peril in this form.
New policy: means the first FloodFlash policy taken out by you in respect of the insured premises identified in the schedule.
Payout: means the maximum amount of money corresponding to a given trigger depth detailed in the schedule that you may receive after suffering a measured flood event, subject to the terms and conditions of this policy.
Policy: means this policy document, the schedule and any endorsements, which together form the insurance contract between you and us.
Premium: means the sum of money you need to pay us to buy the policy.
Premium due date: means the date the premium is due to be paid, as per your schedule.
Proof of loss: is a certification from you of your actual loss sustained provided after the measured flood event that resulted in a final payment calculation being made.
Renewal date: is the date that a renewal policy starts. It is the date immediately following the last day of the previous insured period.
Renewal / Renewed policy: means a policy for an insured period following the expiry of a previous FloodFlash policy with no time gap in cover.
Schedule: means the policy schedule, which sets out the specific details of cover under the policy.
Statement of fact: means the document setting out details of the insured premises that you provided to us. We use that information to set the premium for your policy.
Trigger / Triggered: means the FloodFlash sensor detecting a measured flood event and sending the data to us.
Trigger depth: means the depth of water that you selected to initiate a claim under your policy detailed in the policy schedule. You may have chosen more than one of these for your policy.
Waiting period: means the first 14 days of the insured period of a new policy. During this time no liability under this policy for a measured flood event or otherwise can arise.
We / Us / Our: means FloodFlash Limited of 9th Floor, 107 Cheapside, London, EC2V 6DN, United Kingdom or its principals and / or agents acting on its behalf identified in the 'Coverholder' section of the schedule.
You / Your / Yourself: means the legal entity identified in the 'Policyholder' section of the schedule or agents acting on its behalf.
Analysis
New policy is just that; the first FloodFlash policy taken out by an insured for the premises listed in the schedule.
Payout is defined as the maximum amount of money the insured may receive connected to any given trigger depth listed in the schedule. The Payout occurs after the insured has suffered a Measured flood event.
The policy document, schedule and endorsements are all defined as the policy that forms the contract between the insured and the company.
Premium is a defined term and is the amount of money the insured must provide to pay for the policy.
The premium due date is the date when the premium is due to be paid to the company.
Once a loss has occurred the insured is required to provide a proof of loss. Proof of loss is defined as a certification from the insured of the Actual loss sustained after a flood occurred and the insured received payment for losses.
The Renewal date is defined as the day the renewal policy starts and is the date immediately following the last day of the previous policy period. Also defined is Renewal/Renewed policy, which is a policy that renewed immediately after the prior policy expired with no gap in coverage.
Schedule is defined as well, and is the schedule used to set out the details of coverage in the policy. Many insureds are not familiar with insurance terminology.
A document setting out details of the described premises for the company is called the Statement of fact. The company uses it in setting the premium for the policy. It is not a statement related to claims, it is simply providing the details of the location necessary in premium development.
An important term is Trigger/Triggered. This occurs when the sensor detects a measured flood event that sends data to the company notifying it that the insured has suffered a measured flood event.
Trigger depth is defined as the depth of water selected by the insured and listed in the schedule to initiate a claim when that depth is reached. An insured may select more than one Trigger. For example, an insured can have trigger depths of 1 foot, 5 feet, 10 feet, or more. FloodFlash will pay for each measured flood event that reaches each of the insured's selected trigger depths.
Most flood policies have a waiting period. The Waiting period for a FloodFlash policy is defined as the first fourteen days of the insured period of a new policy. There is no coverage for any flood event that may occur during that first fourteen days.
As usual, the policy defines We/Us/Our as the company itself and the address is provided. It includes agents acting on behalf of the company.
Likewise, You/Your/Yourself are defined terms to identify the policyholder.
Christine G. Barlow, CPCU
Christine G. Barlow, CPCU, is Executive Editor of FC&S Expert Coverage Interpretation, a division of National Underwriter Company and ALM. Christine has over thirty years’ experience in the insurance industry, beginning as a claims adjuster then working as an underwriter and underwriting supervisor handling personal lines. Christine regularly presents and moderates webinars on a variety of topics and is an experienced presenter.