Commercial insurance policies may provide private flood coverage. These are not common, but policies should be fully read, and flood coverage is usually found in an endorsement or a Difference in Conditions policy. One question is, “how much flood coverage is available?” A recent case found that the endorsement did not provide a dollar limit to the business income and extra expense claim.1

The court noted that an endorsement provided flood coverage to a policy that excluded flood as an insured peril:

Without a flood endorsement, the policy did not cover ‘loss or damage caused directly or indirectly’ by flood or other water damage. However, Seven Acres’ policy included an optional flood endorsement which modified the policy and included flood as a Covered Cause of Loss.

The endorsement also provided the following regarding a policy limit for flood:

E. Limits of Insurance
1. Per ‘Occurrence’ Limit Of Insurance

The most we will pay for loss or damage caused by Flood in any one ‘occurrence’ is the applicable per ‘occurrence’ Limit Of Insurance shown in the Flood Declarations regardless of the number of locations involved.
3. Maximum Per ‘Occurrence’ Limit Of Insurance

Regardless of the number of per ‘occurrence’ Limits shown in the Flood Declarations, the Maximum per ‘Occurrence’ Limit Of Insurance shown in the Flood Declarations is the most we will pay in any one ‘Occurrence’.

The insurer’s position was:

Hanover also relies on the language and definitions in the flood endorsement which state the policy will only cover $4.5 million for all loss and damage caused by flood. Because the flood endorsement provides a benefit to Seven Acres not otherwise afforded by the policy, Hanover maintains that Seven Acres is bound by the terms and the limit of the flood endorsement.

Hanover relies on language in the policy that the ‘most we will pay for loss or damage caused by Flood in any one ‘occurrence’ is the applicable per ‘occurrence’ Limit Of Insurance shown in the Flood Declarations regardless of the number of locations involved.’ Hanover further cites language in the flood endorsement which states ‘Occurrence’ means all loss or damage that is attributable to an act, event, cause, or series of similar, related acts, events, or causes involving one or more persons or not involving any persons.

The policyholder argued the limit did not apply to the business income portion:

Seven Acres responds that the language of the policy is unambiguous that the flood limit does not also cap business-interruption and extra-expense claims arising out of a flood event. Seven Acres addresses the structure of the policy noting that the property-coverage form covers ‘direct physical loss’ to real and personal property. The Business Income Coverage Form covers business losses flowing from a suspension of business operations due to a covered direct physical loss. The business-income coverage has a separate premium and limit from the property coverage. Given that the flood endorsement added flood as a covered cause of loss under the policy, Seven Acres argues that the flood endorsement and its limit applied only to ‘direct physical loss.’ Seven Acres also argues that if Hanover wanted to make business-income and extra-expense claims subject to the flood limit, then Hanover could have expressly added language to that end as Hanover did with other provisions in the policy.

The court found for the policyholder with the following logic:

Flood, which the policy defines as a ‘general and temporary condition of partial or complete inundation of normally dry land areas,’ causes direct physical damage or loss to property. The flood endorsement adds flood as a Covered Cause of Loss and therefore provides insurance coverage for ‘direct physical loss’ caused by flood. In contrast, the Business Income Coverage Form provides coverage for actual loss of business income sustained due to the necessary suspension of business operations. The triggering event for business-income coverage is the suspension of business caused by a Covered Cause of Loss. Here, Seven Acres alleged that it sustained actual losses in business income because it was necessary to temporarily suspend its business operations. It was not the flood itself that caused the business-income losses, but rather the temporary suspension of business operations. Therefore, we disagree with Hanover that the parties’ clear intent was that the flood limit shall apply to business-income losses ‘resulting from’ a covered flood event and decline to read additional language into the policy that restricts coverage.

Although the business-income form is part of and related to the other parts of the policy, each part of the policy covers different types of loss, and different forms or endorsements contain different limits that apply to that type of loss. These limits do not apply to other losses not covered by that part. The purpose of purchasing business-income coverage is for an insured to protect itself against monetary losses when the insured was required to temporarily suspend its business operations. Such a claim is intended to coexist with a claim for damage, or physical loss, to a building or other covered property. Because we have no explicit language subjecting business-income claims to the flood limit in this policy, we must give effect to the policy language as written and not effectively read into the flood endorsement a broader exclusion than intended.

If Hanover had intended to restrict business-income claims resulting from a flood event, Hanover should have included language in the flood endorsement to that effect as it has in other endorsements in the policy. For instance, in the Data Breach Coverage Form, the policy specifically states ‘[t]he Additional Expense Coverages Aggregate Sublimit of Insurance is part of, and not in addition to, the Data Breach Coverage Aggregate Limit of Insurance.’

The lesson from this is to Read The Full Policy (RTFP.) How much coverage exists for each type of loss and covered property are important questions. The policyholder was rewarded in this case for questioning the alleged limit of the business income coverage under the flood insurance endorsement.

Thought For The Day

There is a tide in the affairs of men, Which taken at the flood, leads on to fortune. Omitted, all the voyage of their life is bound in shallows and in miseries. On such a full sea are we now afloat. And we must take the current when it serves, or lose our ventures.
—William Shakespeare
1 Hanover Cas. Co. v. Seven Acres Jewish Care Services, No. 14-20-00736-CV (Tex. App. Aug. 25, 2022).