Flood: Understanding and Recovering from One of Nature's Worst Disasters



...residential condominium buildings, if several criteria are met. Replacement cost coverage is available for a single-family dwelling, including a residential condominium unit that is the policyholder’s principal residence and is insured for at least 80 percent of the unit’s replacement cost at the time of the loss, up to the maximum amount of insurance available at the inception of the policy term. Replacement cost coverage does not apply to manufactured (e.g., mobile) homes smaller than certain dimensions specified in the policy. Losses are adjusted on a replacement cost basis for residential condominium buildings insured under the Residential Condominium Building Association Policy (RCBAP). The principal residency and the 80 percent insurance to value requirements for single-family dwellings do not apply to the RCBAP. However, coverage amounts less than 80 percent of the building’s full replacement cost value at the time of the loss will be subject to a co-insurance penalty.

Contents losses are always adjusted on an actual cash value basis. If the replacement cost conditions are not met, the building loss is also adjusted on an actual cash value basis. Actual cash value (ACV) is replacement cost value at the time of loss, less the value of its physical depreciation. 5

Additional Coverages

The NFIP does not provide coverage for business interruption, extra expense or additional living expenses. However, if a business is large enough and can afford the additional premium, extra coverage — including higher policy limits — for flood losses can be purchased from a private insurance company.

A good example of purchasing extra coverage involved a manufacturing facility in the Midwest. The maximum coverage the NFIP provided to commercial properties at that time was $250,000. The manufacturer purchased $50 million in flood coverage outside the NFIP from a private insurance company that covered property and business interruption. Flood struck the facility in 1993 and 18 inches of water flowed through the property. The insurance company adjuster evaluated the loss and offered $3 million for the damages; however, more damage occurred to the property than met the eye.

Under certain circumstances, land subsidence is covered under flood policies. Land subsidence occurs when water moves through soil, washing away the finer particles and causing the soil to sink. Through the aid of a public adjuster and other experts, it was proven that the floodwaters did in fact wash away the fine soil underneath the facility. This changed the soil structure beneath the building, leaving it highly vulnerable to collapse. Five teams of engineers from the insurance company couldn’t refute the evidence and eventually agreed with the claim. Because this loss resulted in property damage and a delay in business, the manufacturer was paid $25 million for property damage and $25 million for business...

5 www.fema.gov