Flood insurance dries up for Kent Valley companies

Two weeks ago, on the same day that Gov. Chris Gregoire urged homeowners and businesses along the Green River to buy flood insurance, an e-mail arrived in Sam Alexander's inbox.

The Seattle insurance broker had a message from his broker at Lloyd's of London, asking about news coming out of the Green River Valley. Underwriters soon were passing around government news releases discussing the Army Corps of Engineers' admission that it might cause a flood to protect the troubled Howard Hanson Dam.

Within a week, the worldwide market for private flood insurance in and around Kent, Auburn and Tukwila had dried up. Underwriters were dissolving the few existing contracts, and domestic insurers stopped writing new policies.

The risk simply was too great.

"It was a relatively unprecedented situation," Alexander said. "Insurance is about the risk of unforeseen events. But here was the Corps announcing that it pretty much intended to flood the valley."

The phenomenon highlights the complications of managing such a slow-moving crisis. By advertising the risks of flooding to protect the safety of area residents, public officials effectively helped kill one of the insurance markets they encouraged citizens to turn to.

Particularly hard hit may be the dozens — perhaps hundreds — of manufacturers along one of the West Coast's biggest industrial zones, places where the machinery alone is worth more than any payout provided by standard government flood insurance.

"For somebody like me, it means if there's a bad flood, I'm out of business," said Eric Scheider, president of Synergy Machine, which builds complex parts for aerospace and medical industries. "The only insurance I can get is federal insurance, which covers a half-million dollars, which is fine, except that I have $1.5 million just in equipment."

And these businesses can't just move to higher ground.

Greg Larkin, with Larkin Precision, owns milling machines and giant metal grinders that weigh 90,000 pounds. Water could fry the electronics, rust internal parts and potentially render precision equipment unusable. And replacement costs on just one of his machines would run $750,000, he said. His best insurance, Larkin said, "is finding a way to keep the water out."

After storms last winter damaged an abutment to the dam, Army Corps Col. Anthony Wright has said he may release water during heavy rains this year to prevent the reservoir from filling too high and stressing the dam. His fear is that too much water could cause the dam to collapse, which could cause a far worse flood.

Wright has said that the risk of flooding may be as high as one in three, but that ongoing repairs ultimately may lower that risk substantially. In the meantime, city, county, state and federal governments are scrambling to shore up levees to reduce or prevent any deluge.

Everyone from local mayors and Metropolitan King County Council members to Gregoire have urged citizens to buy government flood insurance from the Federal Emergency Management Agency. On Monday, U.S. Sen. Patty Murray, and Reps. Dave Reichert and Adam Smith held a news conference along the river and stressed the point again.

And under the circumstances, federal flood insurance is a great deal, said John Graves, who manages the federal insurance program in the region. It is available to anyone, regardless of whether they are in a flood zone: renters, homeowners and businesses. And while rates vary depending on risk, the average national cost is about $650 a year, and the Green River Valley typically runs a little cheaper.

Two types of insurance are available — structural and contents. The first covers damage to building foundations and walls. The second generally includes anything that isn't nailed down, as long as it's not in a basement. Only essential materials are covered if they're in a basement — equipment such as washers, dryers and furnaces.

More troubling for some is that benefits are capped at $250,000 for residential buildings with another $250,000 for home or apartment contents; and $500,000 for business structures plus another $500,000 for business contents. While that likely would cover belongings in most valley homes, it barely scratches the surface for many area businesses.

In other disaster-prone regions — such as hurricane-heavy Louisiana or South Florida — businesses normally make up the difference on the open market, turning to unregulated "surplus lines" carriers such as Alexander who deal in specialized high-risk insurance. But the state insurance commissioner's office earlier this month heard brokers were struggling to find any coverage at all. Graves heard the same.

"Some secondary markets were just redlining the whole Green River Valley," Graves said, adding that they are free to do so in such an unregulated market.

Earlier in the year, some policies were still available and rates were competitive, Alexander said. But as publicity increased about flooding, underwriters backed away. And what policies remained had exclusions for actions taken by governments. Because flooding technically would be decided by the Army Corps, insurers canceled the policies and returned the premiums.

In the meantime, Scheider and Larkin have purchased federal insurance, and Scheider has been shopping around for something more, but he's not expecting much. "Initially my broker gave me an estimate of $5,000, which is high but would be well worth it," he said. "But that was a few weeks ago."

And Alexander is looking for some sugar daddies — wealthy investors willing to take on high risk for a shot at hefty returns by insuring area businesses.

"What we're looking for right now is an underwriter with a riverboat gambler's kind of appetite for risk," he said.

But now that risks are quantifiable, premiums might be so expensive that some business owners would rather use that money to buy sandbags, he said.

Craig Welch: 206-464-2093 or cwelch@seattletimes.com