By Derek Kartchner | Gila Insurance
I recently received a phone call from a customer rehabbing a home. The home had been purchased out of foreclosure, and the investor had to evict an occupant after having purchased the home.
She called and exclaimed, “I had a flood!” “Okay,” I asked, “What happened?” “Well,” she said, “My house is flooded. Water started coming up from the sink, toilet, and tub. Let’s just say it wasn’t clean water!”
The short of the story is that the water caused damage to the walls, flooring in the bathroom, and adjacent rooms. While the cause is unknown, it is suspected that the prior occupant broke in, flushed rags down the toilet, and eventually caused the water to back up.
Ultimately, there was $80,000 in damage to the home that had just been completed. The trouble? The customer rejected coverage for Water Backup of Sewers and Drains. Because the available coverage was extremely limited for Water Backup, the customer didn’t feel it was worth purchasing. To their point, $5K for an $80K loss isn’t a lot of coverage, but I have to admit, that was a particularly large claim.
What is Water Backup of Sewers and Drains? Water Backup claims are usually not pleasant. It is wastewater going the wrong way instead of draining, it is coming back up. This can be caused by a multitude of factors: municipalities working on the lines, a malfunctioning valve on a mainline (oftentimes due to incorrect installation), municipalities trying to push water uphill, tree roots, or rags provided by angry evicted prior occupants. An insurance policy does NOT automatically cover water backup and coverage has to be specifically added by adding a water backup endorsement.
Typically, coverage is limited to $5,000 or $10,000 and usually costs in the neighborhood of $50 – $75 per year for every $5000 worth of coverage purchased. Is it worth it?
Coverage of Water Backup is limited because it happens frequently. The dirty little secret is that insurance companies avoid perils that happen consistently. They either limit coverage, charge a large premium, or exclude it altogether. Therefore, if you want to see what an insurance company views as a likely claim, look for what they avoid, limit, or surcharge.
Regardless, you should make sure you have good communication with your tenants and ask them to let you know about plumbing issues. Typically, landlords do not shower or wash dishes in their rentals and don’t know if the water is draining properly. They also don’t know what the tenant’s kid just flushed down the toilet! As seen in the story above there can be value even in the case of a flip. As an agent who has seen it all, I believe there is value in this coverage.
As always, familiarize yourself with the coverage available, and weigh your options. Do you need water backup coverage added to your policy? The key is to work with an advisor who can explain your options, help you understand the coverage, and make that decision for yourself.