Commercial insurance can provide private flood protection. These are not common, but policies should be read in full, and flood protection is usually found in an endorsement or difference in terms policy. One question is “how much flood protection is available?” A recent case found that the approval did not place a dollar limit on the company’s income and ancillary expenses.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 Acres̵
7; policy included an optional flood endorsement that amended the policy to include flood as a covered cause of loss.
The endorsement also provided the following regarding a policy limit for flooding:
E. Insurance Limits
1. Insurance limit for ‘Occurrence’The most we will pay for loss or damage caused by flooding in an ‘event’ is the applicable limit of insurance per ‘occurrence’ shown on the flood declarations regardless of the number of locations involved.
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3. Maximum limit of insurance per ‘event’Regardless of the number of limits per ‘occurrence’ shown on the flood declarations, the maximum limit of insurance per ‘occurrence’ shown on the flood declarations is the most we will pay for each ‘occurrence’.
The insurer’s position was:
Hanover also relies on language and definitions in the flood endorsement that state the policy will only cover $4.5 million for any loss and damage caused by flooding. Because the flood endorsement provides a benefit to Seven Acres not otherwise offered by the policy, Hanover argues that Seven Acres is bound by the terms and limits of the flood endorsement.
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Hanover relies on language in the policy that “the most we will pay for loss or damage caused by flooding in an ‘occurrence’ is the applicable limit of insurance per ‘occurrence’ shown on the flood declarations regardless of the number of locations involved.’ Hanover further cites a language in the flood permit stating that “occurrence” means any loss or damage attributable to an act, event, cause, or series of similar, related acts, events, or causes involving one or more persons or involving no persons.
The policyholder argued that the limit did not apply to the business income portion:
Seven Acres responds that the language of the policy is unequivocal that the flood limit does not also limit business interruption and additional expense claims arising as a result of a flood event. Seven Acres addresses the structure of the policy, noting that the property coverage form covers “direct physical loss” of real and personal property. The business income coverage form covers business losses arising from an interruption of business operations due to a covered direct physical loss. The company income protection has a separate premium and limit from the property cover. 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 claim business income and extra expenses subject to the flood limit, then Hanover could have expressly added language to that effect as Hanover did with other provisions of the policy.
The court found for the policyholder with the following logic:
Flooding, which the policy defines as a “general and temporary condition of partial or complete inundation of normally dry lands,” causes direct physical damage or loss of property. The flood endorsement adds flood as a covered cause of loss and therefore provides coverage for “direct physical loss” caused by flood. In contrast, the business income coverage form provides coverage for actual loss of business income that occurs due to the necessary suspension of business operations. The triggering event for business income coverage is suspension of operations caused by a covered cause of loss. Here, Seven Acres argued that it incurred actual losses in business income because it was necessary to temporarily suspend its business operations. It was not the flood itself that caused the companies’ loss of income, but rather the temporary suspension of business operations. Therefore, we disagree with Hanover that the parties’ clear intent was for the flood limit to apply to business income losses “arising out of” a covered flood event and decline to read additional language into the policy limiting 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 protection is for an insured to protect themselves against monetary losses when the insured had to temporarily suspend their 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 express 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’s recommendations a broader exclusion than intended.
If Hanover had intended to limit claims for business income resulting from a flood event, Hanover should have included language in the flood endorsement to that effect, as it has in other policy recommendations. For example, in the data breach coverage form, the policy specifically states “[t]The policy’s aggregate sublimit for additional expenses for coverage is part of, and not in addition to, the aggregate data breach coverage limit for the policy.’
The lesson from this is that Read the full policy (RTFP.) How much coverage is available for each type of loss and covered property are important questions. The policyholder in this case was awarded for challenging the alleged limit of business income coverage under the flood insurance endorsement.
Today’s thought
There is a current in the affairs of men, which at the flood leads to fortune. Left out, their entire life’s journey is bound in shallowness and misery. In such a full sea we are now afloat. And we must take the power when it earns, or lose our bets.
—William Shakespeare
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1 Hanover Cas. Co. v. Seven Acres Jewish Care ServicesNo. 14-20-00736-CV (Tex. App. August 25, 2022).
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