1. Forms
2. CP
3. CP-04-38

Form CP 04 38: Discharge From Sewer, Drain Or Sump (Not Flood Related)

1. What the form is

The CP 04 38, titled "Discharge From Sewer, Drain Or Sump (Not Flood Related)," is a commercial property insurance endorsement that provides coverage for direct physical loss or damage caused by the discharge or overflow of water or waterborne material from a sewer, drain, or sump pump located on the described premises. Importantly, this coverage applies specifically to incidents that are not related to flooding. The endorsement can also extend to cover time element losses, such as business income and extra expense, if the insured carries those coverages. The limits for this coverage are sub-limits stated in the endorsement, and separate sub-limits can be designated for direct physical damage and time element coverage.

2. Classes of business it applies to

This endorsement is valuable for a wide range of commercial properties, particularly those with basements, below-grade infrastructure, or extensive plumbing systems. Examples include:

• Real Estate: Office buildings, retail centers, and apartment complexes, especially older buildings or those in areas with aging municipal sewer systems. For instance, a retail store in a downtown area with an older combined sewer system could benefit from this coverage if a sewer backup (not caused by a flood) damages inventory in a basement storage area.
• Hospitality: Hotels and restaurants, which often have extensive kitchen and laundry facilities, as well as basements for storage or mechanical equipment. A restaurant could face significant cleanup costs and business interruption if a floor drain in the kitchen overflows due to a blockage in the building's private drain line.
• Healthcare: Hospitals and clinics, particularly those with below-grade levels housing critical equipment or patient records.
• Manufacturing: Facilities with industrial drains or sump pumps essential for their operations. For example, a manufacturing plant that relies on sump pumps to keep a sub-basement dry where critical machinery is located would find this coverage essential.
• Habitational: Condominium associations and commercial unit-owners can also utilize this endorsement.

3. Special considerations

• Non-Flood Related: It is crucial to understand that this endorsement specifically excludes damage caused by flood. Flood-related sewer or drain backups are typically addressed by a flood endorsement (like the CP 10 65) or a separate flood policy. The definition of flood in this context includes surface water, waves, tides, and overflow of any body of water.
• On-Premises Source: The discharge must originate from a sewer, drain, or sump located on the described premises.
• Maintenance Exclusion: Coverage may not apply if the discharge results from the insured's failure to properly maintain or repair the sewer, drain, or sump equipment. For example, if a sump pump fails because the insured neglected routine cleaning and it becomes clogged with debris, the resulting water damage might not be covered.
• Sump Pump Power Failure: Sump pump failure due to a power outage is generally not covered unless the policy is specifically endorsed to cover power failure.
• Repair of the System Itself: The endorsement typically covers the resulting damage from the discharge, not the cost to repair or replace the sewer, drain, sump pump, or related equipment itself.
• Sublimits and Aggregates: The coverage is subject to a specific limit shown in the endorsement's schedule, which is part of, and does not increase, the overall policy limit. An annual aggregate limit may also apply, meaning the total amount paid for all such occurrences in a policy year will not exceed this aggregate limit.
• Deductible: Policy deductibles apply to losses covered under this endorsement. If a loss is only payable under this endorsement, the fire deductible typically applies.

4. Key information for agents and underwriters

• Risk Assessment: Underwriters should carefully assess the age and condition of the building's plumbing and drainage systems, as well as the property's susceptibility to sewer backups (e.g., properties in low-lying areas, areas with known sewer problems, or those with basements). The history of past sewer or drain backup incidents is also a key underwriting consideration.
• Pricing: Pricing for this endorsement will depend on the selected sub-limits, the property's characteristics, and its perceived exposure to this type of loss.
• Coverage Gaps: Agents should highlight the distinction between this endorsement and flood coverage to avoid misunderstandings. It's important to explain that this endorsement fills a specific gap for non-flood related water backup from on-premises systems. Ensure clients understand the exclusions, particularly regarding lack of maintenance and power failure to sump pumps.
• Underwriting Guidelines:
  • Inquire about the presence and maintenance of backwater valves or other preventative measures.
  • For properties with sump pumps, ascertain the pump's age, condition, maintenance schedule, and whether a backup power source (e.g., battery backup) is in place.
  • Consider the occupancy and the potential for significant damage or business interruption if a discharge occurs (e.g., high-value stock in a basement, critical operations in lower levels).
  • Review the relationship with the CP 10 65 Flood Coverage Endorsement to ensure there are no unintended overlaps or gaps if both coverages are provided.
• Loss Prevention: Advise insureds on the importance of regular inspection and maintenance of their sewer lines, drains, and sump pumps to minimize the risk of loss and ensure coverage viability.