Water damage vs. small businesses

Although this guide is primarily concerned with damage caused by flooding of residential properties insured under domestic insurance policies, there are some applications for small businesses or SMEs (small and medium-sized enterprises) operating in residential-type premises; examples might be corner shops and small electrical retailers in mid terrace properties.

For small businesses, many of the issues in terms of drying out and repairing their properties will remain the same since the fabric of the buildings is usually identical to that found in domestic properties. There are however three key issues which differentiate the domestic from the commercial situation - the position under a lease, the scope of insurance cover, and the actual claims process.

fig79 Small businesses will not just lose equipment, furniture and furnishings from flooding; they may find that they can't operate or trade, lose vital records, and suffer loss of profits - all insurable risks

Freehold, leasehold and tenancy issues

Consideration needs be given to the legal position in terms of who has responsibility for damage, even if accidental. This will depend on the wording of the freehold, leasehold or tenancy arrangement in place.

Hopefully policyholders will already have an understanding of their responsibilities, but it can be frustrating if works need to be delayed until all parties in the claim situation have sight of the legal documents (e.g. tenancy agreements). Matters can become even more complicated where there are improvements to the building which have been carried out by the tenant or leaseholder but which have not yet reverted to the landlord.

In these circumstances it's usual for an insurer to appoint a loss adjuster who will request sight of leasehold or tenancy documents to clarify responsibility for repairs.

Where repairs to the property more correctly fall under the landlord's insurance arrangements rather the tenant's, the tenant must advise the landlord of the situation as quickly as possible to ensure that the insurance company is made aware of a potential claim within the time limit stipulated by the policy terms. Failure to do so, or action taken by the tenant without the insurer's approval, may prejudice the landlord's claim.

Scope of commercial insurance policies

Most commercial insurance policies will have been arranged through an insurance broker, and this should be the first port of call by an affected policyholder following a flood damage event unless the insurer stipulates otherwise. The broker will ensure that the insurance company is notified in accordance with the claims notification requirements of the policy, and , in addition, will be able to advise the business owner of the extent of cover available. Some brokers also have 'delegated authority' which is a degree of authority from the insurance company to make decisions on its behalf.

Commercial and domestic policies are by their nature very different and may give different levels of cover, even if the types of affected premises are similar. A detailed explanation of commercial insurances is beyond the scope of this guide but as an overview:

++commercial insurance policies don't normally operate the same type of new-for-old cover that homeowners enjoy

++commercial insurance policies often contain conditions which are specific to the nature of the business being carried out. Some of these conditions, known as warrantees, may render the policy void if a condition has not been complied with

++some policies operate on a pro-rata basis which reflects the adequacy of the sum insured; where the value of a property is understated, only a proportion of the claim may be paid corresponding to the degree of underinsurance

++policy excesses, or 'deductibles', may be higher than those for domestic policies

++there may also be insurance cover for loss of profit due to interruption of the business, sometimes known as 'consequential loss cover'. Also the landlord may be covered for loss of rent while a leased or tenanted building is uninhabitable.

Claims process

In most commercial situations of significant value and complexity, where there is disruption to the business or where the value of the property repairs exceed a couple of thousand pounds, the insurer will appoint a Loss Adjuster to investigate the claim. The loss adjuster will report to the insurer on matters of policy liability, including the responsibilities of the parties under any tenancy or leasehold arrangement, and generally guide the claim to a conclusion.

Loss adjusters are independent and impartial experts whose fees are paid for by the insurer. Their fees are not increased should the claims settlement figure be reduced for any reason; in other words, they have no personal incentive to reduce the value of a claim. Policyholders also have the option to appoint a firm of public loss assessors who will assist them in preparing the claim. The loss assessors, who are paid by the policyholder, also examine the insurance policy and the insurer's response to the loss, and formulate and present all aspects of the claim to the insurer's loss adjuster.

They will also negotiate on the policyholder's behalf.

In addition a claim for flooding of a small business will also normally need to consider stock, trade contents, and tenants fixtures and fittings. This will be insured separately to building and contents policies - very possibly under an entirely different policy through different insurers. These other insurers may wish to appoint loss adjusters with particular expertise. In these situations, communication between the parties is essential to ensure a coordinated 'one team' approach as far as is practicably possible. Where appropriate to do so, different insurers should consider the appointment of the same firm of loss adjusters to deal with all aspects of a claim at the same premises.

Where building repairs are concerned, the affected business will be encouraged to fund the repairs and then recover payment from the insurer net of VAT if the business is registered. At that time, any deductions for underinsurance or the policy excess may be applied. This process differs from the domestic situation where the insurer or loss adjuster may directly appoint a repairer to carry out repairs and deal with the repair costs directly.

If the activities of the business have been affected, the insurance policy may also provide additional cover for the cost of accelerating the schedule of repair work (e.g. by working overtime) to offset insured consequential losses or loss of rent where it's cost effective to do so.

As in domestic repair situations, health and safety issues remain important, and compliance with CDM Regulations is obligatory.