What the Insured Said
Let’s bring this discussion back full circle to discuss what happened. What did the insured actually mean by “We had a flood?”
Knowing what we know now, let’s look at how the various policies might respond, if at all, to the insured’s specific “flood” scenario.
“We had a water pipe burst and damage the carpet in the office area.” This is not a “flood” loss as we now understand the term. This is simply “water damage.” Is this loss covered? Assuming the damage occurred during the night (or even the morning) and did not take place over a 14-day or longer period of time, yes – this claim is covered. There are no exclusions in the CP 10 30 (Causes of Loss Form – Special Form), CP-85 (Special Perils Part) or CO 1000 (COP policy form) removing coverage for this loss.
But, a follow-up question must be asked, “What caused the pipe to burst?” If the answer is, it just suddenly burst, the insured is still OK. If, however, the answer involves freezing arising from the intentional lack of heat (failure to maintain heat) in the building, the supposed “flood,” which is really “water damage,” may be excluded by application of the CP 10 30’s (Causes of Loss – Special Form) “B.2.g.” exclusion, the “2.h.” exclusion in AAIS’s CP-85 and the “2.i. Increased Hazard” exclusion in the AAIS COP form.
“One of our forklift drivers was carrying a load that was taller than he thought. He hit and broke a sprinkler head ‘flooding’ the warehouse.” Once again, this is not a “flood” according to the insurance definition of the term. This is simply water damage; and the loss is not excluded by any of the property forms considered (ISO’s CP 10 30, AAIS’s CP-85, or AAIS’s CP 1000) so the claim is paid. However, loss control should be sent to conduct forklift training. Also, since the insured has obviously turned off at least part of the sprinkler system, check the policy for a protective safeguards or protective device endorsement to make sure all provisions are followed.
“The River Styx overran its banks last night because due to the large amount of rain we’ve had over the last several days. We had about three feet of water in the first floor. We estimate about $300,000 in building and property damage (at replacement cost).” This is truly a “flood” by insurance standards! No coverage provided by either the CP 10 30, CP-85 or unendorsed CO 1000. But which, if any, policy responds on a primary basis and/or excess basis (if applicable) is a function of several questions:
- In what “flood zone” was the property located?
- Was there a DIC policy in effect?
- Was the Flood Coverage Endorsement (CP 10 65) attached?
- Was the property on a COP with the Flood Endorsement (CP 1223) attached?
- Was the property eligible for an NFIP policy?
- Was an NFIP policy written?
Assume the following answers: 1) the property is located in Zone A; 2) Yes, a DIC policy is in place; 3) No, the underwriter did not allow the attachment of the CP 10 65; 4) Coverage was not written on a COP; 5) Yes, the property was eligible for an NFIP policy; and 6) Yes, an NFIP policy is in place. Applying this set of facts, clearly the primary and likely only policy to respond is the NFIP policy – on an ACV basis. The DIC does not respond because the NFPA-maximum-coverage deductible in SFHAs has not been crossed (remember, the maximum available is $500,000; the flood only caused $300,000 in damage). The cost to the insured is the flood coverage deductible PLUS the difference between ACV and replacement cost (RC).
But what happens if the facts are different? Let’s assume the answers are: 1) the property is located in a “Shaded X” Zone; 2) Yes, a DIC policy is in place – with an NFIP-maximum-coverage deductible for Zones A, V, and “Shaded X”; 3) No, the underwriter did not allow the attachment of the CP 10 65; 4) Coverage was not on a COP; 5) Yes, the property was eligible for an NFIP policy; and 6) No, an NFIP policy is not in place (the insured depended on the DIC protection). With these changes, there is NO coverage provided by any form. Obviously, since there is no NFIP policy in effect, no coverage is available from there. But what about the DIC, won’t it drop down? No, the DIC will not pay because of the “Shaded X NFIP-maximum-coverage deductible” problem introduced and highlighted previously. The cost of this loss must be paid in full by the insured (until the errors and omissions (E&O) court convenes).
Change the facts again and yet another answer emerges. For this scenario the facts are: 1) the property is located in Zone X; 2) Yes, a DIC policy is in place with a $25,000 deductible (except in Zones A, V, and Shaded X); 3) No, the underwriter did not allow the attachment of the CP 10 65; 4) Coverage was not on a COP; 5) Yes, the property was eligible for an NFIP policy; and 6) No, an NFIP policy is not in place. The DIC policy pays for this loss, but only in excess of the $25,000 deductible. If the DIC provides RC, the insured has no other direct loss expense beyond the deductible.
Let’s look at one last option not providing coverage on a COP. The answers are: 1) the property is located in Zone X; 2) No, a DIC policy is in not in place; 3) Yes, the underwriter allowed the attachment of the CP 10 65; 4) Coverage was not on a COP; 5) Yes, the property was eligible for an NFIP policy; and 6) Yes, an NFIP policy is in place. Coverage is provided by the NFIP policy and the CP 10 65. The NFIP policy pays the primary loss (subject to its deductible) up to the ACV; and the CP 10 65 pays the difference between the ACV and the replacement cost. The deductible is the insured’s only out-of-pocket expense for the direct loss.
Replacing ISO with AAIS’s COP Policy Including the Flood Endorsement
Let’s review each of the four scenarios changing only the placement of the flood coverage; now using the COP with the Flood Endorsement (CO 1223) attached.
- Scenario 1: The answer does not change. Because the property is located in a SFHA, the COP underwriter is likely going to exclude that location from the Flood Endorsement. Because the total loss is below the DIC’s $500,000 “NFIP-maximum” requirement, the only place to get coverage is the NFIP policy.
- Scenario 2: This situation depends on the underwriter and his/her underwriting of a property located in a non-SFHA zone. COP underwriters generally don’t exclude a location from the Flood Endorsement if it is outside “traditional” SFHAs (A and V zones). If the underwriter did not exclude this “Shaded X” location from the schedule, the COP’s Flood Endorsement covers this loss at replacement cost (if the underlying policy is written on a replacement cost basis) and the insured pays the deductible. The only cost to the insured is the deductible.
- Scenario 2, revisited: If the underwriter does exclude the location because it is in a “Shaded X,” the coverage answer is what it was when initially presented, there is no coverage from any source if the DIC applies the “Shaded X” deductible.
- Scenario 3: If flood coverage is extended from the COP with the Flood Endorsement attached, there is no need for a DIC policy. The COP policy with the CO 1223 pays this loss in full subject to the deductible, provided the loss does not exceed the aggregate or catastrophe limit (which is somewhat unlikely).
- Scenario 4: This loss is more interesting when there is a COP with the Flood Endorsement attached. Because the COP’s Flood Endorsement extends flood protection on a primary basis, there is no reason for an NFIP policy. The COP’s Flood Endorsement covers the entire cost subject to the applicable flood deductible.
Plainly, as the facts change, the coverage combinations change and the base forms change, the answer regarding which policy pays changes. Not every scenario can be discussed, to do so would require many more pages. Understanding how each policy responds is more important than exploring every possible scenario. Let’s return to two other possible insured responses/possible losses.
“The sewer backed up during the night and water spewed out of all the drains damaging the floors and some furniture.” This is a potential problem based upon which advisory organization’s policy form applies to the property. Before looking at the differences between ISO’s and AAIS’s response to this loss, two key factors must be understood. First, this does not qualify as a “flood,” so neither the NFIP policy, the CP 10 65 endorsement nor the CO 1223 responds. Second, it is unlikely a DIC form would be written to include the back-up of sewers and drains (though some might).
If coverage is written on an ISO form, the CP 10 38 (Discharge from Sewer, Drain or Sump (Not Flood Related)) is the only source of protection for this claim. Since the insured chooses the limits of coverage provided by the CP 10 38, the self-evident issue is whether or not the correct limits were chosen.
Every edition of the three ISO Cause of Loss Forms (CP 10 10, CP 10 20 and CP 10 30) specifically excludes within the “water damage” exclusion damage caused by water that backs up or overflows from a sewer, drain or sump. This includes the current 10 12 edition, the 06 07 edition and every version of these forms all the way back to each respective 11 85 edition. Without the CP 10 38 – Discharge from Sewer, Drain or Sump (Not Flood-Related) there is no coverage for this loss.
Presumably, as there seems to be no rule to the contrary, this endorsed additional cause of loss can be attached to any edition of the Cause of Loss forms; even if a carrier chooses to not adopt, or delay the adoption of, the most current editions. However, the CP 10 38 endorsement is not yet available in every state nor from every insurance carrier. Without the CP 10 38, there is no coverage.
When considering AAIS’s possible responses to this loss, both the “standard” and the COP policy must be analyzed. The “standard” cause of loss forms and the COP respond differently to this loss.
When coverage is provided through any of the “standard” AAIS CP forms, an endorsement is required for coverage to exist. Like the ISO cause of loss forms, the AAIS “standard” cause of loss forms exclude damage caused by the backup of a sewer or drain. To garner sewer or drain coverage, the CP-607 (Water Damage – Backup of Sewers and Drains) endorsement must be attached. Again, the insured chooses the limit of coverage provided by this endorsement; for the loss to be covered in full (subject only to the deductible), a sufficient limit must be chosen.
How does the COP (version 3.0) and the COP XL respond? Even unendorsed both COP forms provide coverage for this loss. Supplemental Coverage “11.” of the COP (CO 1000) grants $25,000 coverage limits for damage caused by the backup of a sewer or drain. The Supplemental Coverage of the COP XL (OL 1000) provides up to $100,000 of coverage for the backup of a sewer or drain.
“Water seeped through the walls of the basement during the heavy rains last night flooding the entire computer room.” There is little suspense here; the insured is on its own for the cost of this damage if coverage is written through either ISO or AAIS “standard” cause of loss forms. Only if the insured is protected by one of the COP forms is coverage available.
Additionally, lacking a general “flood” condition, this does not qualify as a flood as covered by the NFIP or CP 10 65 (in fact this loss is specifically excluded from the coverage provided by both). AAIS’s COP Flood Endorsement does not address this type of loss either because such a loss is not within the CP 1223’s definition of flood. Unless the DIC form, if one exists, has been specifically and purposefully written to include this loss, no coverage is available from it.
AAIS’s COP and COP XL forms extend coverage for this loss from the same supplemental coverage used to provide coverage for the backup of sewers and drains. The limits for this cause of loss are the same as/share the supplemental coverage limits for the backup of a sewer or drain; the COP provides $25,000 of protection and the COP XL $100,000. There does not appear to be an endorsement available to increase these sub-limits.
As stated previously, there is no “standard fix” for this exclusion. The insured pays this entire water loss from its own resources unless one of two options exists: 1) coverage is written on a COP form; or 2) the insurance carrier offers a proprietary “broadened water damage” endorsement that specifically covers this cause of loss.
(NOTE: No scenario presented above addressed indirect losses such as the loss of business income or the pay out of extra expenses. If indirect losses are included as part of these scenarios, the amount of loss and amount that must be paid out of the insured’s pocket, the applicability of coverage, and how coverage is garnered changes greatly.)
“Flood” has a specific meaning within insurance. The insured may report a “flood” loss that is actually a “water damage” claim. Knowing how each available policy and endorsement responds to “water damage” or defines “flood” allows for improved protection planning and design. Endorsements or wholly separate policies generally must be attached to find coverage for “water damage” or flood (with the COP forms being the only exception).
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