The 2012 storm season will certainly rank as one of the nation’s most damaging flood events on record and perhaps, one of the worst ever to affect the commercial real estate industry. Like many of its predecessors, Superstorm Sandy packed a powerful punch with physical and economic damage exceeding $60 billion. Early predictions position Sandy for the number two spot, following Hurricane Katrina, as the nation’s second-worst storm for claims paid out by the National Flood Insurance Program (NFIP). In the wake of the flood and along the road to recovery, now, more than ever, commercial property owners must be proactive about flood risk to limit exposures, minimize losses and decrease costs.
Flood risk management is more than a program responsive to severe weather events. It is a continuing practice that examines whether or not a structure is adequately insured and whether or not coverage is commensurate with the actual risk. It is a practice that goes beyond a designation on the Federal Emergency Management Agency (FEMA) flood insurance rate map (FIRM) to assess how well a property’s individual characteristics such as construction, age, location and mitigation efforts will fare during catastrophic flood events and analyzes property-specific information, including deeds, plot maps, surveys, elevation certificates, flood zone determinations, flood-proofing certifications, flood claim history and property improvements. Flood risk management allows property owners to identify the true risk to adequately protect the property, capture savings and increase value.
Recently, an international real estate private equity firm initiated a flood risk program for two of its U.S. property locations with insured structures designated in the high-risk flood zone. Working with flood risk specialists, an analysis revealed that properties in question were not at high risk of flooding during catastrophic rainstorms and were wrongly included in the SFHA (Special Flood Hazard Area). The properties were reclassified to a low-risk flood zone and the firm saved $36,000 in annual flood premiums for the structures and increased their value by more than $500,000. For another international real estate leader with luxury properties in the southeastern region of the U.S., flood risk management uncovered a significant error in elevation certificates used to rate the policies of six insured structures, resulting in a 95% premium reduction and an increase of $1.6 million in the value of the properties.
The predictable consequences of flooding, namely devastating effects to people, property and infrastructure, have yet to remedy the complexities of identifying risk and determining commensurate coverage. Much like wind, rain and the surge of severe storms, erroneous flood zone designations, the lack of NFIP reforms, outdated flood maps and the status of local flood control measures pose a significant threat to your real estate investment.
Let’s examine these complexities in more detail. The NFIP, which is administered by FEMA, was created in 1968 by Congress to provide residential and commercial insurance coverage for flood damage, to improve floodplain management and to develop maps of flood hazard zones. The NFIP makes flood insurance available to homeowners and businesses whose communities agree to adopt and enforce management regulations to mitigate flood damage. Unfortunately, while the NFIP’s pricing structure offers subsidized rates to high-risk properties, it offers true actuarial rates to low-risk properties, which, in essence, penalizes owners of low-risk properties for being low-risk and makes no sense. Further, property owners whose lenders are federally regulated, supervised or insured by federal agencies, are subject to a mandatory purchase requirement. What we have learned since the program’s inception and certainly as a result of storms such as Hurricanes Andrew and Katrina, the Mississippi Flood of 2011 and Tropical Storm Irene, is that the program is consistently in debt, subsidizes irresponsible development despite good intentions, places an undue burden upon property owners to foot the bill of those who are truly high-risk and continues to rely upon outdated data to designate properties vulnerable to flooding. Much needed reforms to the NFIP, as well as, a proposal for business interruption insurance coverage for businesses where operations are restricted or suspended due to flooding, ended up on the chopping block when Congress passed legislation reauthorizing the NFIP until September 30, 2017.
FEMA established special flood hazard areas (SFHA), which marry historical meteorological data with topographical maps to identify geographical areas that have a one-in-100 chance of having a flood in a given year. These areas are depicted on flood maps and are used to generate a flood zone determination, which lenders use to justify mandatory coverage. Despite a nearly $2 billion map modernization project initiated in 2008, many FEMA flood maps still do not account for changes due to new development, levee improvements, repairs or decertification and other elements that change the flow of floodwaters within the floodplain. The maps paint broad strokes of flood risk and do not reflect whether or not a home or building in a SFHA is designed to mitigate flooding or constructed in a flood safe manner. Further, the maps do not reflect drainage patterns or the performance and/or maintenance of flood control systems.
So here’s the takeaway for commercial property owners. Flood risk management enables you to implement a program of due diligence. Whether your insurance broker is calculating appropriate risk retention levels, negotiating flood deductibles and coverage limits afforded by a property policy or trying to rate an NFIP or excess flood policy, it is critical to have the right flood zone classification for each building. Having a flood risk management program in place and getting the flood zone correct will help you protect your assets, obtain flood insurance at the lowest cost and more wisely budget your dollars because not all flood risk is equal.
Michael "Mike" Allison is vice president of AmeriFlood Solutions, Inc., a risk management company specializing in flood risk evaluation and serving property owners throughout the United States who are required to purchase flood insurance by their respective lenders. www.amerifloodsolutionssaves.com