The local authority's demand for a letter of indemnity for flood damage
Dec 31, 2025
Question:
Hi Itzik,
Today we held a discussion with the representatives of the project...
The representative office requests confirmation from the project's insurance agent that there is no impediment for our insurance policy for the project to also cover flood damage related to the building's location in the floodplain area.
I would appreciate your response by email.
thanks.
Answer
The issue is complex, as I will explain below. In accordance with the project documents in our possession, including the land consultant's report and the plans we examined, below is our professional position regarding the question of insurance coverage for flood damage, including in light of the property's location in a floodplain, and in light of the excavation plan that includes significant penetration into the groundwater level.
The project is located in an area that has been defined as having hydrological risk, among other things due to the ground surface and groundwater level measured at a depth of 5–6 meters. According to the foundation and excavation design, direct penetration of groundwater to a depth of approximately 2–3 meters is expected. In addition, significant uplift pressure must be dealt with, lining with slurry walls, and foundation with bentonite piles. This is a complex project from an engineering and planning perspective, with high sensitivity to groundwater risks and external flooding, as well as risks to structures in the project's vicinity as a result of changes in the hydrological balance.
1. Site characteristics and risk level
As of this date, most insurance companies in the local market, as well as international reinsurers serving the Israeli market, take a very conservative approach when it comes to planned groundwater intrusion. In most cases, this type of damage is excluded from standard coverage in contractor work policies, and only rarely can a dedicated extension be purchased for them, usually with a high deductible and restrictive terms.
This trend stems from insurers' accumulated experience with incidents that have led to significant damage on construction sites, especially in dense urban areas. Therefore, even when some coverage can be obtained, it is often limited and of limited scope.
Under these circumstances, and in accordance with the findings of the engineering report on the project, we will need, when we reach the stage of examining the insurance proposals for the project, to explicitly address the issue of groundwater infiltration - and we will make an effort to achieve an optimal response.
To the extent that it is not possible to obtain insurance coverage for damages resulting from groundwater intrusion, we recommend that our clients take an alternative contractual and operational approach, by contracting with a groundwater foundation and degradation contractor who takes full responsibility for the performance of the work and its damages. Over the past two years, we have searched for and located companies for our clients that take full responsibility for the foundation and degradation work, and hold adequate insurance for these works. This type of contract allows for hedging the insurance risk in the project, while distributing responsibility neatly among the professional parties and creating a complementary protection envelope for the project policy.
2. The position of the Israeli and international insurance market in relation to projects involving groundwater intrusion
As part of the conditions of the building permit in areas defined as "flood prone," the Tel Aviv Municipality requires that the developer and the landowners sign an indemnity and waiver of claims, in which they declare that they will not file a lawsuit against the local authority in the future for flood damage. It is important to understand that signing such a document may affect the insurance company's ability to replace the property in the event of damage - that is, even if insurance coverage exists, a legal restriction may be created on the insurance company's exercise of the right of replacement, which could be detrimental since it violates the terms of the policy.
Under these circumstances, this document should be considered an integral part of the project's risk management system and reviewed in advance with your legal advisors.
3. And in our case - a letter of indemnity regarding flood relief for the local authority
As of this stage, an active policy has not yet been formulated for the project, as it has not yet entered the execution phase. As a result, it is not possible at this stage to issue a certificate of insurance or to commit to future insurance terms, including adding specific clauses such as waiving a lien in favor of the municipality .
Of course, it would have been better for us – and this is our practice on projects where this is possible – to obtain in advance confirmation of insurance coverage from the municipality, which includes a waiver of substitution clause. But naturally, this is too early a stage.
Upon receipt of your advance notice (at least 3 months in advance is recommended), we will prepare an insurance specification and contact all insurance companies to receive a quote. We will formulate the best offer and address this issue in a focused manner.
4. The correct solution - issuing an insurance certificate in favor of the municipality before construction begins
5. Summary and recommendations
a. When we reach the execution stage - we will make an effort for the project policy to include explicit coverage for risks related to groundwater penetration and flooding.
b. We will unequivocally recommend mitigating the risks of groundwater and flood plain through the engagement of a subcontractor with appropriate capacity who assumes the responsibility and maintains suitable insurance.
c. Any document of commitment to the local authority, and particularly a flood plain indemnity letter, must be examined in advance with the legal advisors accompanying you.
d. In the current state of the Israeli insurance market, when the possibility of obtaining explicit coverage for flooding in an area defined as a "flood plain" is limited, and when it is known in advance that groundwater penetration is planned, and the level of insurance coverage is limited and sometimes conditional on stringent conditions - signing an indemnity letter to the municipality constitutes a component that should be addressed within the framework of calculated entrepreneurial risk management, with awareness of its potential impact on the ability to realize future rights from the insurer, contrary to the policy terms.
e. The way to overcome what is stated in section d is through having the insurance company that will insure the project sign a certificate of insurance in favor of the municipality including waiver of subrogation, to the extent that market conditions permit this.