Hurricanes, insurance and buying a business in Florida

Every established Florida company has lived through storms, and how it came through them tells you a lot. When you buy one, you take on its storm risk along with its customers, and the cost of insuring that risk becomes your cost.

That's no reason to avoid Florida. It's a reason to look at storm risk early, while it can still shape the price and the terms, instead of the week before closing. The National Hurricane Center puts the Atlantic season from June 1 to November 30, with most activity between mid-August and mid-October, so plan your timeline with that in mind.

Start with the flood zone

Look up the company's address on FEMA's Flood Map Service Center. Check every place that matters: the building, and any yard where trucks, equipment or inventory are kept.

• High-risk areas begin with the letters A or V on FEMA flood maps. FEMA also calls them special flood hazard areas.
• Moderate to lower-risk areas are marked B, C or X. Lower risk isn't no risk: from 2014 to 2024, nearly one-third of flood insurance claims under the National Flood Insurance Program came from outside high-risk areas, according to FEMA.
• An elevation certificate shows how high a building sits compared with how high local floodwaters are expected to get. Ask the owner whether there is one. If not, the city or county floodplain manager may have one on file.

Think about access too. A dry building doesn't help if the roads around it flood and employees and customers can't reach it. Our post on choosing where to buy covers how location shapes a company more broadly.

Flood insurance is a separate policy

FEMA notes that many business owners assume a general commercial insurance policy covers flooding, and that this is often not the case. Here's what the National Flood Insurance Program offers businesses, from FEMA's summary of commercial coverage:

• Up to $500,000 for the building and up to $500,000 for its contents, such as equipment and inventory. Each has its own deductible, and a policy covers one building.
• A company that rents its space can still insure its own contents.
• It does not cover financial losses from business interruption or loss of use, most vehicles, or property outside the building, like fences and walkways.

Timing matters. A new flood policy generally takes effect 30 days after purchase. There's no wait when the policy is bought while making, increasing, extending or renewing a mortgage, so ask your agent whether your purchase qualifies.

If you own a property in a high-risk zone and have a government-backed mortgage, flood insurance is required. For an SBA loan, the SBA's lending rules require it for any building pledged as collateral that sits even partly in a high-risk area, and for equipment and inventory pledged as collateral inside such a building. Private flood insurance can be accepted if it meets the same requirements.

If the building or its contents are worth more than those limits, ask your agent how the rest would be covered.

Wind coverage

Wind is the other half of hurricane risk. Some commercial policies in Florida exclude wind, which then has to be covered some other way. Ask your agent plainly: is wind covered, and what would the deductible for a hurricane claim be, in dollars?

If private insurers won't cover a building, there's a fallback. Citizens Property Insurance Corporation, a not-for-profit government entity created by the Florida Legislature, offers commercial policies to businesses that can't find coverage in the private market and meet its eligibility rules. In certain areas, that includes wind-only policies, which cover only damage from hail and wind storms.

One timing trap: under Citizens' rules, agents can't bind new coverage or increase coverage while a tropical storm or hurricane watch or warning is in effect for any part of Florida. Ask whether the insurers your agent uses have similar rules, and get your coverage bound well before closing, especially during hurricane season.

Business interruption coverage

Business interruption coverage, also called business income coverage, helps replace the income a company loses when it must close because of damage to its property. The Florida Department of Financial Services explains the limits in its questions and answers and a short guide:

• Generally, there's no coverage for lost income that didn't result from direct physical damage to insured property. Closing ahead of a storm, by itself, usually isn't covered.
• If the property policy excludes wind, the business interruption coverage would also exclude losses caused by wind.
• Flooding is generally excluded.
• Closures from losing electricity, gas or water, and income that isn't documented, may not be covered.
• Benefits usually start after a waiting period of 48 to 72 hours after the damage, and coverage is typically for 30 days, though insurers may offer up to 12 months.

The point about documented income matters for buyers. If a company's books don't fully show its income, an insurer may not pay for income it can't see.

Check the company's storm history

Ask the owner about each significant storm in the years they've owned the company:

• Was the business closed, and for how long?
• What was damaged, and what did the repairs cost?
• Were insurance claims made, and were they paid in full?
• What did revenue look like in the months that followed?
• Did any employees leave?

Then ask for documents:

• The current policies, with their declarations pages (the summary of coverage, limits and deductibles).
• The insurer's record of past claims.
• Renewal notices for the last few years.
• Repair invoices.
• Several years of monthly revenue.

Ask too whether the company has any disaster loans outstanding, and have your attorney's lien search confirm the answer.

Storms can also distort the numbers. A roofing company may have a burst of repair work after a storm that makes a year or two look better than normal. A restaurant may lose weeks of sales. Look at enough years to see what a normal one looks like.

Finally, look at how the company prepares: the roof's age and condition, shutters or impact windows, a generator, where vehicles go during a storm, and whether its records are backed up somewhere safe.

Build it into the price and the deal

• Get your own quotes during due diligence. The seller's premiums may not be what you'll pay. If insurance will cost you more, subtract the difference from owner earnings (profit plus what the owner pays themselves, before loan payments and taxes). For a company that sells for about 3 times a year's owner earnings, every extra $10,000 a year in insurance takes about $30,000 off what it's worth to you.
• Expect your lender's requirements. Under the SBA's rules, 7(a) loans over $50,000 need hazard insurance on everything pledged as collateral, with a few narrow exceptions for smaller loans. If required insurance isn't available, the loan can't be approved.
• Read the lease. Who repairs the building after a storm, whether rent pauses while it can't be used, and whether either side can end the lease all matter. See the commercial lease.
• Plan for damage before closing. Ask your attorney how the purchase agreement handles a storm that hits between signing and closing.
• Keep cash in reserve for deductibles and for days when the doors are closed.

What to do this week

1. Look up the company's address on FEMA's Flood Map Service Center.
2. Ask the owner for the current policies, the claims history and recent renewal notices.
3. Ask a commercial insurance agent who works in that county to quote wind, flood and business interruption coverage before you set a price.
4. Go through each recent storm with the owner: how long the business was closed, what was damaged and how claims went.
5. Ask your attorney how the purchase agreement will handle storm damage before closing.