My property is wet, it must be a flood

Resource kit 90526

By Dan Corbin, CPCU, CIC, LUTC

Water is one of those essential elements we need to sustain life, provide comfort and bring happiness, but under the right conditions, it can make us unhappy, uncomfortable and dead. Because we need it, we like to keep it close at hand, even in our homes. Unfortunately, sometimes it gets too close and nothing but fire can be more destructive than water. (Can you spell Noah?)

Have you ever considered how many different ways water can intrude our homes and cause property damage? There is the bursting washing machine hose, the ruptured water bed, the frozen pipes, the window left open, the overflowing toilet and the leaking roof. Then we have the sewer backup, the sump pump failure, the water main break, the neighbor's sprinklers and the above-ground pool discharge. If that's not enough, Mother Nature brings us torrential rains, thunderstorms, tornados, windstorms, monsoons, cyclones, typhoons, high tides, hurricanes and tsunamis. Yes, we have a love- hate relationship with water.

I realize there are still people who continue to believe that a homeowners policy covers all types of water damage, including flood damage. However, I expect there are many more who believe that having a flood insurance policy together with a homeowners policy will encompass any water damage loss they experience, especially, if the homeowners policy includes the Water Back Up And Sump Discharge Or Overflow (HO 04 95) endorsement. Unfortunately, the combination of a homeowners policy and a flood policy does not provide seamless coverage for water damage.

Problem No. 1 The National Flood Insurance Program policy has a very carefully crafted definition of "flood," while the homeowners policy does not define the term at all. A flood must attain a certain threshold of size in order to be considered a NFIP "flood." The water must either cover two acres (about the size of a baseball outfield—approximately 87,000 square feet) or cover more than just the policyholder's own property. A flood that does not reach these proportions is neither covered by flood insurance nor covered by the homeowners policy.

Problem No. 2 Notice that the NFIP policy covers the "unusual and rapid accumulation or runoff of surface waters ...." So, if there is no surface water, there is no coverage. Water that enters the home through the ground below the surface is not a covered flood if it also does not accumulate on the surface. Water that "seeps or leaks on or through the covered property" is only covered "if there is a flood in the area and the flood is the proximate cause of the ... seepage of water." There is no coverage for damage in basements when caused by groundwater seepage.

1 The good news is that if the flood does meet the NFIP threshold, then it covers the "unusual and rapid accumulation or runoff of surface waters from any source." Did you catch that? Any source. This could be a broken water pipe, a discharge from an above-ground pool, a blocked storm drain or a ruptured water storage tank.

Problem No. 3 Suppose your client purchased the Water Back Up And Sump Discharge Or Overflow (HO 04 95) endorsement. The endorsement covers water that backs up through sewers or drains, or overflows or is discharged from a sump. However, it does not cover such backup or overflow if it is the result of a flood (undefined). This is because the 2000 edition of the ISO HO 04 95 form has retained the Water Damage exclusion with regard to backups and discharges that are a direct or indirect result of flood.

Now suppose the client's sump overflows due to surface water that has inundated only his land, a quarter-acre lot. The HO 04 95 endorsement will not cover the loss because it is a flood (undefined), but neither does the NFIP policy because the flooding (defined) only occurred on the client's property, and was less than two acres in size.

There is good news, though, for policyholders who have purchased the latest 2011 edition of the HO 04 95 endorsement. The entire Water Damage (now referred to as the Water exclusion in the 2011 forms) has been removed, which means there is coverage for sewer backups and sump discharges resulting from floods. Note that the loss cannot be caused by the negligence of the insured and the backup must originate from within the insured’s dwelling.

Problem No. 4 The NFIP flood policy covers only personal property that is located in a building at the described location. The homeowners policy covers property away from the residence, but does not cover flood damage; that is, if the policy is the HO 00 03 (HO-3) form. Fortunately, the Insurance Services Office 2000 Homeowners Program reintroduced the HO 00 05 (HO-5) form as an option. The HO-5 policy specifically covers water damage to personal property located away from the premises owned, rented, occupied or controlled by the insured. Consequently, there is a solution for filling the off-premises flood gap. An insured whose car is overcome by flooding and incurs water damage to personal property located in the car would be able to obtain coverage under the HO-5 policy. (Prior to the 2000 Program, this same coverage used to be offered in the HO 00 15 endorsement to the HO-3 policy.)

With all the hurricanes down south and the endless autumn rain in the Northeast, these and many other difficult water damage coverage issues keep coming back again and again. It's enough to drive a producer to drink—water, of course.

2 Flood definition Excerpts from the NFIP Dwelling form II. DEFINITIONS A.1. Flood, as used in this flood insurance policy, means: 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:

• overflow of inland or tidal waters; • unusual and rapid accumulation or runoff of surface waters from any source; • mudflow*; or • 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 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."

V. EXCLUSIONS C. We do not insure for loss to property caused directly by earth movement even if the earth movement is caused by flood. Some examples of earth movement that we do not cover are:

1. earthquake; 2. landslide; 3. land subsidence; 4. sinkholes; 5. destabilization or movement of land that results from accumulation of water in subsurface land area; or 6. gradual erosion.

D. We do not insure for direct physical loss caused directly or indirectly by any of the following:

5. water or waterbourne material that: a. backs up through sewers or drains; b. discharges or overflows from a sump, sump pump or related equipment; or c. seeps or leaks on or through the covered property; unless there is a flood in the area and the flood is the proximate cause of the sewer or drain backup, sump pump discharge or overflow, or seepage of water;

8. theft, fire, explosion, wind or windstorm.

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