Insurance cover for heavy rain and flooding in commercial property insurance

The consequences of the floods, particularly in the western part of Germany, indicate that the damage caused by the recent disastrous storm will be enormous in Germany alone. Some of the damage is likely to be covered by property and business interruption insurance. Whether insurance cover exists in an individual case and the extent to which costs relating to the repair of the damage incurred (in particular clearance and disposal costs) are covered by the insurance is of course determined by the insurance policies in place in each case and the underlying insurance T&Cs.

1. Relevant insurance products at a glance

Most commercial property insurance products provide insurance cover for property damage caused by floods. In Germany, the cover is often based on the insurance T&Cs for risks in addition to fire insurance (ECB 2010) from the German Insurance Industry Association. According to these T&Cs, the insurer provides compensation for insured property which is destroyed, damaged or lost as a result of flooding or backwater.

Using an average policyholder as a basis, Germany’s Federal Court of Justice interprets the term “flooding” broadly. The Court’s 4^th Division for Civil Matters has held that flooding exists when water drains to a significant extent, mostly with harmful effects, not through normal channels but onto land not otherwise used, thereby flooding it (Federal Court of Justice, judgment of 26/4/2006 — IV ZR 154/05).

It is even easier to determine insurance cover in the case of “all-risk” policies. These policies generally provide insurance cover for insured property damage, regardless of whether that damage is caused by a named peril. Damage to property, whatever the cause, is therefore covered. It should be noted, however, that even in all-risk policies, individual causes are often excluded from the scope of cover by being listed in the risk exclusions. Careful analysis of the T&Cs is therefore essential for determining insurance cover in this case, too.

In commercial property insurance, insurance covers not only the restoration/replacement of the damaged/destroyed insured items, but also numerous cost items, including removal and demolition costs in particular.

In addition to the primary property and financial damage, there is often also insurance cover for disruption to business in connection with the occurrence of insured property damage in the form of business interruption insurance. The cover provided by commercial business interruption insurance is based on insuring risks in addition to fire-related business interruption insurance (ECBUB 2010) from the German Insurance Industry Association.

In business interruption insurance, the insurer makes good the loss of income suffered by the policyholder as a result of the insured business being disrupted due to an insured property loss. The loss of income usually consists of the running costs (in particular the wages and salaries of employees, rent payments, electricity and heating costs) and the loss of the policyholder’s operating profit. The exact calculation is often difficult in practice and usually requires expert assessments. The involvement of external experts and the necessary coordination with the insurer should be carefully monitored to ensure efficient settlement of claims.

Many commercial policies also insure other expenses in the event of business disruption, such as additional costs the policyholder incurs as a result of purchase obligations (e.g. storage and transport costs, interest, additional stallage costs). The costs covered in each individual case must be clarified by interpreting the relevant insurance T&Cs.

If there is separate property insurance (machine/electronics insurance) in addition to commercial property and business interruption insurance, we strongly recommend checking whether the insurance covers natural disasters.

2. Recommendations for making sure cover is in place

In the event of a claim, the policyholder is subject to a number of contractual obligations it must comply with so as not to jeopardise the insurance cover. These include in particular:

• Reporting the claim immediately: The policyholder is obliged to notify the insurer immediately of the occurrence of an insured loss.
  
  
• Documenting the damage carefully: To provide evidence of an insured loss, the policyholder should carefully document the damage. Under market-standard insurance T&Cs, the policyholder is also required to leave the damage unchanged until the area of damage or damaged items have been released by the insurer. If changes are unavoidable, for example due to necessary measures to minimise damage, the damage must be clearly documented (e.g. with photos) and the damaged items must be kept until the insurer has visited. Documentation of the damage also includes making an inventory of damaged property. Finally, in addition to complying with insurance policy obligations, careful documentation is required in order to enforce possible claims against the insurer by way of court action where payment is wrongfully refused.
  
  
• Taking measures to mitigate the damage: The policyholder is obliged, after the insured damage has occurred, to ensure damage prevention and reduction as far as possible. In doing so, it must obtain and follow instructions from the insurer on damage prevention/reduction, including verbal or telephone instructions if appropriate, provided that the circumstances permit and that compliance is not unreasonable in the specific circumstances. In the event of a claim, it is therefore necessary to take early action to prevent further damage to insured property and to involve the insurer as early as possible in the management of claims.