The Truth About Flood Insurance

Flood, Rain and Water – The Unholy Trinity of Insurance

Flooding is something that keeps insurance companies up at night. It is a natural disaster that wreaks incredible amounts of damage, destroying homes, vehicles, businesses and lives. Floods don’t seem to grab headlines quite as much as flashy volcanoes or monstrous tsunamis (there is something anti-climactic about watching water levels slowly rising on a tv), but they are every bit as destructive.

And because of climate change, it appears likely that floods are becoming more likely in the future. Of course, this summer has certainly given us plenty of examples, with the catastrophic flooding in Calgary during June, as well as the month’s worth of rain Toronto recieved in the past 24 hours. That said, there are some who feel the link between climate change and rain is not quite as strong as you may believe.

Despite the argument over whether we should expect more or less flooding in the future, the fact remains that floods cause extreme damages to property. The Calgary floods alone are expected to cost between $3-5 billion. With such high expenses, you would think insurance is in place precisely for problems like this… but you’d be wrong.

The Truth

The truth is, insurance isn’t designed with massive catastrophes like a flood in mind. Insurance generally isn’t for natural disasters at all, because insurance companies would simply go bankrupt if it was.

Insurance is all about spreading risk. Twenty people buy a policy for their vehicle, when it is unknown which of the twenty are going to be in an accident. Every year there are one or two accidents, and the cost is split between the policyholders (as the price of the insurance, known as “premium”), so no single person is stuck with paying all the costs in one year, and instead pays a small amount for many years.

Now think about instead of having one or two accidents, there are 20. The company that is providing the policies does not have the money to pay for all of the claims, so they either need to increase premiums to equal the cost of an accident (think premiums reaching $25,000) or go bankrupt.

And that phenomenon is what happens during floods, or other natural disasters. Nearly every single person has a claim, so the insurance companies cannot spread risk, and simply go out of business. This is why flood, as well as many other natural disasters and acts of war, are excluded from your insurance policy.

According to the Registered Insurance Brokers of Ontario standard form habitational contract:

There is no coverage for loss or damage caused by waters on the surface of where water does not usually accumulate.

Your home is not covered from surface water damage resulting from a flood. You have to pay for that damage yourself. Not an easy pill to swallow is it? Especially if the destruction ranges up into the billions.

What do we Recommend?

The brightside about water damage (if there is such a thing as a brightside to damage) is that your vehicle can be covered from it through named perils, comprehensive or all perils coverage, and some forms of commercial insurance also protect your business from floods.

There are also some steps you can take to protect your home:

• Get sewer backup (SBU) coverage. We already discussed SBU in       an earlier blog, and it is a great way for your to protect your home from flooding. SBU is pretty much essential, whether you have property insurance in Kingston, Oshawa, Barry’s Bay or Trenton. Check your policy, and make sure you have it.
• Defend your property the old fashioned way – common sense and a sump pump. Insurance may not protect your property from floods but you can. Ditches, sandbacks and emergency pumps are all options to protect your property in the face of minor flooding.

As always, talk to your broker about flooding. And if you have no one to talk to, talk to us. We may not be able to cover you from floods, but we will make sure you understand what is and is not covered, and are ready for the things that are not. After all, knowing if half the battle.