Flood, Flood, or Flood: What is Really Meant When a ‘Flood’ Loss is Reported? – Part I

Part I

“We’ve had a flood,” says the commercial insured. “Oh, no!” the agent says as he quickly reviews the file documentation to confirm whether flood coverage was even offered. Then the key question is asked, “What happened?” What really happened and the coverage implications of what happened are what commercial property agents must consider before the loss – not when this call comes.

“What happened,” really means, “Tell me what you mean by ‘flood.'” The description of the “flood” event has major coverage implications, including, but not limited to:

• Was the event truly a “flood” as defined within insurance?
• Which policy covers the loss?
• Is there even a policy available to pay for the damages?
• How much coverage is provided for the described loss?
• What valuation method is used to value the damaged property?

Before listing the insured’s possible responses, and how the coverage provided and/or available responds, if at all, let’s review the various “water-loss,” “water damage” and “flood” definitions, terms, conditions, exclusions and provisions found in: 1) commercial property forms promulgated by both Insurance Services Office (ISO) and American Association of Insurance Services (AAIS); 2) AAIS’s two main Commercial Output Program (COP) forms; 3) ISO’s flood coverage endorsement (CP 10 65); 4) AAIS’s flood coverage endorsement (CO 1223); 5) difference-in-conditions forms; and 6) the National Flood Insurance Program’s (NFIP’s) General Property form. As each form is detailed, the differences and need for a clear understanding of the protection provided by each becomes evident.

Water-Related Exclusions in ISO and AAIS “Standard” Commercial Property Cause of Loss Forms

All three ISO commercial property cause of loss forms (CP 10 10, CP 10 20, and CP 10 30) specifically exclude water damage as do the three “standard” AAIS cause of loss forms (CP-82, CP-83 and CP-85). ISO’s three key exclusions are found in the water damage exclusion (“B.1.g.”), while the AAIS water damage exclusion is found in “1.g.” of the “Perils Excluded” section of the cause of loss forms. (The AAIS cause of loss forms discussed in this section are considered “standard” because of the AAIS’s COP policy detailed in a later section. All references to “standard” AAIS forms are in regard to the CP-82, CP-83 and CP-85.)

ISO’s “B.1.g.(1)” exclusion and AAIS’s “1.g.1)” exclusion removes protection for damage caused by floods, surface water, waves, tides, tidal waves, overflow of any body of water (including their spray) whether or not the water or spray is driven by wind. Additionally, “B.1.g.(2)” and of all three ISO cause of loss forms exclude damage caused by mudslide and mudflow; the AAIS water damage exclusion does not address mudslide or mudflow (except in the earthquake exclusion), potentially making the AAIS forms broader. These exclusions in the ISO cause of loss form can be “fixed,” to some extent, by use of a separate policy (from NFIP or a DIC policy) or by endorsement to the property policy (the CP 10 65). The AAIS “standard” coverage form exclusion can only be “patched” by attachment of a separate policy (an NFIP or DIC policy).

Damage caused by water that backs up or overflows from a sewer, drain or sump is excluded by both ISO and AAIS. This exclusion is found in “B.1.g.(3)” of ISO’s water damage exclusion and “1.g.2)” of AAIS’s version of the water damage exclusion.

Although the backup of a sewer, drain or sump is excluded, now both ISO and AAIS offer endorsements to close this coverage gap. Historically ISO offered no option to remedy its sewer or drain overflow exclusion; however, ISO introduced and filed in 2013 the Discharge from Sewer, Drain or Sump (Not Flood Related) (CP 10 38) as a new coverage option. The sewer/drain exclusion in the AAIS form can be removed by attachment of the CP-607 (Water Damage – Backup of Sewers and Drains) endorsement. Both the ISO and AAIS forms require the insured to choose a sublimit of coverage for damage caused by the backup of a sewer or drain.

Damage caused by water below the surface of the ground pressing on, flowing or seeping through foundations, walls, floors, paved surfaces, basements, doors, windows or any other opening is specifically excluded by both ISO and AAIS. ISO’s fourth exclusion (“B.1.g.(4)“) and AAIS’s third exclusion (“1.g.3)”)is particularly troubling because there is no “fix” in the standard forms. Further, there is neither an endorsement nor an extension of coverage in the NFIP form to cover the cost of this type of damage. Since there are no standard DIC policies, this exclusion may or may not be addressed by such forms.

Some insurance carriers offer proprietary endorsements to cover these underground water losses (often referred to as “Broadened Water Damage” endorsements). These proprietary forms extend water protection beyond just the backup and overflow exposure to include damage caused by the pressure of underground water that seeps or flows through foundation walls, floors or other such surfaces. However, neither ISO nor AAIS offers such extension of coverage by policy wording or any endorsement within their standard forms.

Beyond the “B.1.g.” water exclusion, ISO’s special cause of loss form (CP 10 30) applies several other water-related exclusions. These include damage caused by or a consequence of:

• The continuous or repeated seepage or leakage of water…over 14 or more days (“B.2.f.“);
• Water…that leaks or flows from HVAC or other equipment (except fire protection systems) caused by or resulting from freezing (unless the insured has tried to maintain heat or the equipment has been drained) (“B.2.g.“); or
• Hot water boilers or other hot water heating equipment caused by or resulting from any condition or event inside such boilers or equipment (other than an explosion) (“C.1.b.“).

AAIS’s special cause of loss form (CP-85) applies these same three exclusions. Continuous or repeated seepage (14 days or more) is excluded in “2.n.;” the freezing exclusion is found in “2.h.;” and the hot water boiler/hot water heating exclusion in the AAIS form is found in exclusion “2.” Of the section entitled “Additional Property Excluded and Limitations.”

Additionally, ISO’s CP 10 30 (Causes of Loss – Special Form) excludes from coverage the cost to repair any defect to a system or appliance from which water escapes (see “C.4.“). AAIS’s CP-85 (Special Perils Part) also excludes these costs in sub-paragraph “2.Tearing out and Replacing” of the Additional Coverages section.

Lastly, ISO’s CP 10 30 excludes the interruption of water necessary for the business’ operation is excluded by the utility service exclusion (“B.1.e.“). Insureds who depend on water for their operations should consider attaching one or both Utility Services endorsements. The direct damage exposures are covered by the CP 04 17, and to cover the cost of an indirect business income losses resulting from the loss of utility services the CP 15 45 is attached.

AAIS, too, has an utility service exclusion; however, it does not specifically list water as a utility. But the “Utility Failure” wording is broad enough to include the loss of water. The direct and indirect damage exposure resulting from the loss of a utility service can be covered by attaching the CP-94 (for direct damage) and the CP-95 (for business income loss) to the CP-85.

Interestingly, “flood” is not defined in any of the “standard” cause-of-loss forms used by either ISO or AAIS.

Part II picks up from here next week.

Topics Profit Loss Flood Property