High Water and Hard Truths: What Every Small and Mid-sized Business Needs to Know About Flood Risk

In late September 2024, the region of Western North Carolina and East Tennessee was struck by the devastating impact of Tropical Storm Helene. What began as a tropical depression quickly escalated into a disaster, leaving behind destruction and despair for many businesses. While some were fortunate to avoid direct physical damage, others, particularly in business districts like Asheville’s River Arts District and Biltmore Village, faced floodwaters that submerged their properties.

These neighborhoods, home to family-run businesses, restaurants, and boutique shops, were devastated. Beyond physical damage to buildings, many businesses found themselves paralyzed by a lack of power, water, and internet access. Roads were impassable, preventing employees from getting to work and cutting off the flow of customers and supplies.

For business owners, the financial blow wasn’t just the cost of rebuilding—it was the long-term interruption to their operations. For many, the question wasn’t whether they could repair their storefronts but whether they would ever be able to reopen. This situation, unfortunately, is not as rare as it should be. And it highlights a critical vulnerability for many businesses: they assume they are adequately covered when in reality, they are exposed to significant financial risk because of the limitations of their commercial and flood insurance.

The Surprising Gaps in Insurance Coverage

Many businesses rely on flood insurance to protect them from natural disasters, but the truth is that their coverage may not be as comprehensive as they think. A substantial number of business owners are under the impression that their policies will fully cover the financial impact of a flood. However, statistics show that many businesses, especially those that are smaller or located in less flood-prone areas, fail to carry the appropriate levels of insurance. In fact, a Chubb survey found that only 84% of their clients do not purchase flood insurance, which leaves many owners at risk when disaster strikes.

The limitations of traditional flood insurance are numerous and often surprising. Many flood insurance policies include exclusions that can leave businesses exposed:

• Business Interruption Exclusions: Traditional flood insurance may not cover the lost income businesses suffer when they are forced to shut down for an extended period, unless the business itself has sustained direct physical damage. For example, if a business is unable to operate due to infrastructure damage (e.g., loss of power or water), it may not be eligible for a payout.
• Inventory and Equipment Coverage: Often, flood insurance will cover structural damage but may not cover the full replacement cost of inventory, equipment, or furnishings—items critical to the operation of the business.
• Flood Zones: Businesses in regions that aren’t in designated flood zones may falsely assume that flooding won’t affect them. However, non-flood zone areas are still susceptible to extreme weather events, and FEMA data revealed that 20% of all flood claims come from areas outside of designated flood zones.

Given these gaps, many businesses, particularly those in flood-prone regions like parts of Tennessee and North Carolina, face the risk of financial ruin after a flood event.

The Rising Costs of Flood Damage

The economic fallout from floods is more than just a cleanup job; it’s a long-term issue that can prevent businesses from reopening. The Guardian reported the average economic loss per flood event for businesses in the U.S. is $200,00, which can be devastating for a small to medium-sized enterprise (SME).

Moreover, the Small Business Administration (SBA) found that approximately 40% of small businesses never reopen after experiencing a major disaster and another 29% go out of business within two years after. The statistics are even more alarming for businesses that experience prolonged interruptions—those without flood insurance coverage are far less likely to recover. In fact, studies suggest that businesses that are unable to resume operations within five days of a disaster are 60% more likely to close permanently, according to FEMA.

Rethinking the Approach: Beyond Traditional Insurance

To prevent the fallout from floods, businesses must go beyond traditional flood insurance and adopt a more comprehensive risk management strategy. While there is no one-size-fits-all solution, businesses can take several steps to ensure they’re better protected when disaster strikes.

1. Risk Mitigation Strategies: One of the most effective ways to avoid financial losses is through flood mitigation efforts. This could include elevating equipment, installing flood barriers, and investing in improved drainage systems to reduce the physical damage from floods. Additionally, businesses in flood-prone areas can work with local governments to understand flood risks and develop a plan to address these vulnerabilities before they escalate.
2. Developing a Business Continuity Plan: Having a solid business continuity plan is essential. The plan should include strategies for maintaining operations even when a business’s physical location is compromised. This can include remote work capabilities, alternative supply chain options, and contingency plans for communications. 
3. The Role of Captive Insurance: While not the primary option for every business, captive insurance is a growing trend among businesses seeking more tailored coverage. Captive insurance allows businesses to pool their risk with others in similar industries or regions to create their own customized insurance policies. This can cover risks that traditional flood insurance might exclude, such as lost income due to business interruption or the cost of relocating operations.
   An article in Business Insurance highlights the growth of captives among small and mid-sized businesses. And for SMEs, it’s important to note that businesses that use captives for flood coverage can manage both direct and indirect losses, such as the cost of relocating or covering inventory replacement.
4. Risk Retention Groups (RRGs) and Self-Insurance: Businesses too small to form their own captive insurance company can consider joining a Risk Retention Group (RRG) or other collective risk-sharing arrangements. These groups allow businesses to pool resources to cover their flood-related risks. An RRG may be especially beneficial for businesses in industries with common risk exposures, such as construction or retail.
5. Diversifying Revenue Streams: For small businesses, the financial strain caused by flooding can be mitigated in part by diversifying revenue streams. A business that operates multiple locations or offers a variety of products may be more resilient when one part of the operation is interrupted. The ability to pivot quickly or adjust operations can make a significant difference in how well a business can weather the financial impact of a flood.

Conclusion

The flooding caused by Tropical Storm Helene in Western North Carolina and East Tennessee serves as a stark reminder of the vulnerabilities many businesses face when it comes to natural disasters. For small and medium-sized businesses, traditional flood insurance may not offer the comprehensive protection needed to recover quickly and fully. As the data shows, many businesses are left underinsured or completely exposed, often without any recourse to recover their losses.

By adopting a proactive risk management strategy that includes tailored insurance coverage, flood mitigation efforts, and a business continuity plan, companies can better position themselves to survive the financial fallout from a flood. While captive insurance is growing in popularity, it should be seen as just one tool among many that businesses can use to ensure they are not left vulnerable in the face of a disaster.

In the end, the businesses that survive and thrive after a flood will be those that recognize the limitations of traditional insurance and take steps to protect themselves in every way possible. The future of disaster recovery lies in preparation, diversification, and the smart use of tailored financial solutions like captives—solutions that empower business owners to manage their risk with confidence.