Flood, Flood or Flood! Who Responds: AAIS, ISO or NFIP? – Part III
Christopher J. Boggs | Academy Journal Blog
May 13, 2015
AAIS’s Flood Coverage Endorsement
“Flood” becomes a covered cause of loss by attachment of AAIS’s Flood Endorsement CO 1223 (The Flood Endorsement specifically designed for the COP XL is endorsement/form number OP 1101. This form applies the same terms and conditions as the CO 1223; all provisions applicable to the CO 1223 apply to the OP 1101, thus the OP 1101 is not discussed in this white paper). This endorsement is available for attachment only to the COP; it cannot be attached to any of AAIS’s “standard” cause of loss forms (CP-82, CP-83 or CP-85). AAIS offers no flood endorsement for properties insured using the “standard” forms.
AAIS’s CO 1223, unlike ISO’s CP 10 65, does not require use of an underlying NFIP policy; in fact, the AAIS Flood Endorsement provides primary flood coverage up to the limit of coverage in the property policy. Because AAIS’s flood endorsement provides coverage on a primary basis, this endorsement does not act like a “wrap around” policy in the same manner ISO’s flood endorsement does. However, property underwriters will likely not allow this endorsement to be used to extend coverage to properties located in SFHAs; additionally, an underwriter may be unwilling to extend flood coverage from this form to properties located in CBRA or CBIA zones.
As unusual as it is, the term “flood” is not defined in the CO 1223 Flood Endorsement; the CO 1223 refers to and applies the definition of “flood” found in the underlying COP form which defines a flood as: “flood, surface water, waves, tidal water, or the overflow of a body of water, all whether driven by wind or not. This includes spray that results from any of these whether driven by wind or not.” When compared to ISO’s and the NFIP definition of “flood,” key differences become evident:
“Flood,” as defined by AAIS, varies from NFIP’s and ISO’s definition of flood in four ways:
- AAIS does not require the “inundation of normally dry land” for the damage to be considered caused by a flood.
- AAIS does not classify mudslide or mudflow caused by flood waters as part of a flood. However, the COP form contains the “1.b. Earth Movement” exclusion. Mudslide and mudflow are excluded within the earth movement exclusion and thus the listing of mudslide or mudflow does not appear necessary within the definition of “flood.”
- AAIS’s policy includes within the definition of flood the spray of the water, driven by wind or not, from water constituting and defined as a flood. This is more restrictive than either the ISO or NFIP coverage forms because the definition of “flood,” as mentioned previously, is taken from an exclusion in the underlying COP.
- AAIS does not require a “rapid accumulation…” for the incident to be considered a flood.
Like ISO’s CP 10 65, the AAIS flood endorsement extends much broader protection than that provided by the NFIP policy in three key areas:
- Valuation: Property damaged by a flood may be valued at replacement cost rather than actual cash value.
- Business Income: If business income with or without extra expense is covered by the underlying COP policy, flood becomes another covered cause of loss.
- Business Personal Property: There is no limitation on the location of business personal property (BPP). The NFIP policy excludes coverage on most BPP located in a basement; this exclusion/limitation does not exist in the AAIS flood endorsement.
Because the flood protection extended by the COP’s Flood Endorsement (CO 1223) is intended to be primary coverage rather than secondary (like ISO’s CP 10 65), the provisions of the coverage are rather unique. When flood coverage is extended from the COP, the insured is granted access to uniquely broad protection. Provisions of the policy include:
- Primary flood coverage is extended from the CO 1223. An underlying NFIP policy is not required; however, an underwriter may not allow the endorsement’s use on properties in SFHAs or other less-than-desirable zones/areas.
- Any “flood” is covered. The “flood” exclusion found in the underlying COP is completely removed because the definition of flood in the endorsement is taken directly from the COP. Any loss classified and defined as a flood is covered up to the policy limits.
- Flood coverage can be extended on either a scheduled or blanket basis. These are essentially underwriting mechanisms.
- Scheduled basis. The location(s) for which flood coverage is desired or allowed is/are specifically listed. Underwriters require scheduled coverage when there are locations for which they do not want to extend flood coverage (such as locations with a SFHA or other areas where flood coverage is ill advised). Each location is listed but the limit of coverage for a flood loss written on a scheduled basis is subject to the “occurrence limit,” defined as the amount of coverage that applies to a loss in any one occurrence at each location. The occurrence limit is subject to a “catastrophe limit” which is the maximum coverage for all flood losses at all locations during the 12 months of the policy period.
- Blanket basis. Flood coverage is extended to all insured locations. One limit applies to all locations – the “occurrence limit” (as defined above). Blanket coverage is also subject to a “catastrophe limit.”
- Deductible differences. Only one deductible applies to loss for damage to building and/or business personal property. However, the flood loss is subject to a separate flood deductible, so the insured could be subject to a property loss deductible and a flood deductible. AAIS allows the option of using a dollar deductible or a percentage deductible (a percentage of the entire value at a specific location). Unlike the CP 10 65, the endorsement does not limit the insured to just the highest deductible if there are multiple causes of loss (i.e. flood and fire).
- “Aggregate limit”: The “aggregate limit” applies to flood coverage written on either a scheduled or blanket basis and is essentially a sub-limit of the “catastrophe limit.” While the “catastrophe limit” is the maximum paid over 12 months for all flood losses at all insured (scheduled or blanketed) locations, the “aggregate limit” is the maximum amount that will be paid for flood losses at any one location during the 12 month policy period.
- Covered property. The only limitations on the property covered by the flood endorsement are those listed in the underlying COP. If the damaged property is considered covered property in the COP, it is covered property if damaged by flood.
- Waiting period. There is no waiting period in the form language. Coverage is effective when requested/attached. ISO’s flood endorsement has a 72-hour waiting period and the NFIP policy has a 30 day waiting period.
Difference-In-Condition Coverage and Flood Protection
Difference-in-Condition (DIC) forms can be quite misleading with respect to the flood protection extended to the insured. The insured might assume they have protection where they do not. But in the insured’s defense, there is often a gap in DIC-provided flood coverage few expect (or maybe even intended); further not every DIC provider’s policy has this “gap.”
The coverage gap in question revolves around the flood deductible. Most insurance practitioners who commonly work with DIC policies expect and understand that the flood deductible applicable to properties located in SFHA’s is subject to the “NFPA-maximum-coverage” deductible. This simply means that the DIC does not respond until the loss exceeds the maximum coverage amount available from an NFIP policy ($500,000 each on buildings and contents in the General Property Form) – even if the insured is not protected by an underlying NFIP policy.
This underlying NFPA-maximum-coverage deductible for properties located in SFHAs (A and V Zones) is a reasonable requirement. Insurance carriers try to avoid “high probability” loss events, and a 1 percent chance in any given year is a “higher probability” event than most. This requirement is not the problem.
However, some DIC forms throw “Shaded X” into the areas where the insured’s deductible is the NFIP-maximum-coverage – this is the problem (and coverage gap). “Shaded-X” is not considered a SFHA; it, according to FEMA, is a “regular” hazard area (what some might call a 500-year-flood plain). If neither the agent/broker nor insured notice this expanded “NFPA-maximum-coverage deductible” requirement, a flood loss could cost the insured up to $500,000 (rather than the lower deductible listed in the DIC).
Often insureds try to avoid purchasing federal flood insurance when possible; and when told the structure is not located in an SFHA, many opt out of buying the coverage (choosing to depend on the DIC if one is in place). Further, most insurance professionals don’t know the difference between an “X” and a “Shaded X” – and according to FEMA neither zone qualifies as “high hazard” areas. (But remember, approximately 30% of all flood losses occur in non-SFHAs – areas considered “low hazard.”)
As stated earlier, this additional zone requirement is not found in all DICs; that’s why this provision is problematic. If coverage is moved from one DIC carrier to another, the insured might become an unknowing victim of this coverage condition.
Beyond the “Shaded X” problem is the definition of “flood” used by the DIC. The DIC carrier might define flood the same as ISOs CP 10 65 flood coverage endorsement. When this is the case, there is little problem. However, some DIC forms may contain a proprietary definition of flood (remember, there is no standard DIC form) or even one that resembles the AAIS definition. A careful review of the definition of flood is required to assure there is no unintended gap in protection between the NFIP form and the DIC.
National Flood Insurance Program (NFIP) and ‘Limited’ Flood Coverage
The importance and necessity of an NFIP flood policy cannot be overlooked. NFIP coverage is necessary because:
- The CP 10 65 specifically states its coverage is excess over an NFIP policy (even if the insured did not purchase the protection).
- DIC policies generally have an NFIP-maximum-coverage deductible for properties located in SFHAs (and sometimes “Shaded X”).
- The CO 1223 (and OP 1101) does not reference the NFIP policy, but underwriters may not/will likely not allow flood coverage to be extended to properties in SFHAs – necessitating an NFIP policy.
NFIP defines a Flood as: “1. A general and temporary condition of partial or complete inundation of two or more acres of normally dry land area or of two or more properties (at least one of which is your property) from: a. Overflow of inland or tidal waters; b. Unusual and rapid accumulation or runoff of surface waters from any source; c. Mudflow. 2.Collapse or subsidence of land along the shore of a lake or similar body of water as a result of erosion or undermining caused by waves or currents of water exceeding anticipated cyclical levels that result in a flood as defined in A.1.a. above.”
Mudflow is defined as: “A river of liquid and flowing mud on the surfaces of normally dry land areas, as when earth is carried by a current of water. Other earth movements, such as landslide, slope failure, or a saturated soil mass moving by liquidity down a slope, are not mudflows.”
These definitions are essentially the same as those used in ISO’s CP 10 65. The notable differences are 1) the two acres / two properties requirement found in NFIP’s form; and 2) coverage for collapse or subsidence is not found in the definition of “flood” in the CP 10 65 but as an exception to the exclusion of coverage for land. This “sameness” allows the CP 10 65 and NFIP forms to dovetail. But, as was mentioned previously, the definition of flood in a DIC policy may differ from the NFIP policy around which the DIC wraps in SFHAs.
The NFIP policy occupies a special place in the world of insurance forms because: 1) it is written by the government; and 2) rather than being a market of last resort, the NFIP is often the market of only or first resort. This allows the provider of the coverage (the government) to create conditions and requirements not common to other property coverages.
Entire series have been dedicated to understanding the NFIP policy and its surrounding rules and requirements. This white paper is intended simply as a guide towards knowing how to respond when the insured calls to report a “flood” loss. Following are a few key concepts to remember about NFIP’s flood coverage:
- Premium is based on several factors: 1) when the building was constructed (pre-FIRM vs. post-FIRM); 2) in what “flood zone” the structure is located (“hazardous” (A or V) or “non-hazardous” (B, C, or X); 3) the base flood elevation (BFE); 4) the reference point (bottom of the lowest horizontal support in “V” zones or the bottom of the lowest elevated floor in “A” zones); 5) the height of the reference point above the BFE; and 6) other factors that may apply to a specific building (i.e. flood proofing, breakaway walls, approved openings, etc.).
- BPP located in basements, as mentioned earlier, and below the first floor of an elevated structure are subject to severe coverage limitations when buildings are located in SFHAs (“A” and “V” zones).
- “Substantial Improvement,” defined as improvements that increase the value of the property beyond 50 percent of its market value, may change the rating or even the structure’s eligibility for flood coverage.
- “Substantial Damage,” defined as damage beyond 50 percent of the building’s market value, may remove the building from grandfather status as it relates to flood plain management requirements.
- Deductibles apply separately to the Building and BPP. Further, the deductibles for flood in no way affect or are affected by deductibles for any other property loss.
- The NFIP policy provides NO indirect loss coverage (no business income or extra expense).
Again, this is not a complete listing of every important provision in the NFIP coverage form or rules. The above is but a quick review of the limitations of the NFIP form. The form and all its rules are accessible at: http://www.fema.gov/national-flood-insurance-program.
Next week brings the conclusion of this series with Part IV.
The content of this article is intended to provide general information and as a guide to the subject matter only. Please contact an Advise & Consult, Inc. expert for advice on your specific circumstances.