Insurance Guide

The Key to Business Continuity: Understanding Business Interruption Insurance

Business interruptions can vary in severity, from minor inconveniences to major disasters that result in significant financial and physical loss. At times, it’s possible to work through a short blackout, but a more adverse event, in which important business assets are lost, and business operations are forced to cease completely, can be a far more damaging affair.

The financial losses incurred in these situations will often extend far beyond the value of the assets damaged or lost. In addition to replacing or repairing the affected assets, you may need to close your doors temporarily (while continuing to meet financial obligations), and it may take some time to get your business back to where it was before the insured event.

In these situations, business interruption insurance can cover your loss of gross profit, wages, any additional costs to get you back up and running, and the costs to prepare the information for the claim (subject to the terms and conditions of the policy).

What is business interruption insurance?

Business interruption insurance covers your business when an insurable event physically damages business assets, resulting in a reduction in business revenue. The policy may provide cover for the loss of gross profit resulting from an insurance claim that interrupts either your whole business or part of it.

Many New Zealand businesses are becoming all too aware of the importance of business interruption insurance, as disruptions caused by natural disasters like floods and earthquakes have proven devastating for many.

In some instances, prevention of access to insured property is enough to trigger a business interruption insurance claim, however, cover provided by this is restricted so it is worthwhile checking out your insurance policy to see what the cover is.

Who needs business interruption insurance cover?

Most insurance policies are about insuring your assets, whether they be within a business, farm or dwelling. Business interruption insurance, however, goes a step further by insuring against financial losses that could otherwise prove fatal to your business. In many cases, it has been the deciding factor in whether an organisation can stay afloat through an adverse event or must permanently close its doors.

The business continuity and fiscal security offered by a business interruption policy can prove invaluable as your organisation navigates what can be a perilous and particularly stressful situation. As such, this insurance should be considered by any business that relies on physical assets to function, including property, stock and equipment.

Almost every business can benefit from business interruption insurance. Having the backing of a well-crafted policy can:

Help your business survive unforeseen and incredibly damaging insured events.
Offer peace of mind during the most stressful of times for a business owner and allow you to focus on rehabilitating and reopening your business.
Help your business retain its customers by providing the emergency assistance needed to keep trading.

What is covered by business interruption insurance?

Business interruption insurancecan provide cover for the gross profit your business would have earned, based on performance, financial records and trends, if the insurable event had never occurred.

Generally, cover for a reduced or total loss of gross profit begins from the date that trading is halted by the insured event. It typically continues to be paid out until your business opens again or the indemnity period concludes – whichever comes first.

The indemnity period is the time that the insurance company will pay for the business’s loss of gross profit. This is nominated when the insurance is taken out and should reflect the time you think it will take you to get your business up and running and trading to the pre-loss turnover plus any trends.

A business interruption policy is designed to cover loss of gross profit resulting from an insured loss to your business assets insurance. Your policy may include the following cover:

Gross Profit

Designed to bring the insured back to where it would have been financially, assuming the insurable event had not occurred. This is limited by the sum insured and indemnity period selected. It is important to get this right and we recommend getting the advice of a suitably qualified insurance broker, insurance agent or professional advisor.

Additional Costs

These are the costs that are not planned for but lead to a reduction in turnover resulting from an insured loss, being mitigated. This could include setup costs at a new (or temporary) premises, the additional rents that may be incurred, advertising and marketing costs.

Claim Preparation Costs

Reasonable costs for the professional who works on your behalf to ensure that you are getting exactly what you are entitled to when you are entitled to it. This could include things such as progress payments towards wages, providing assistance in calculating your loss of gross profit, and other costs.

Tailoring business interruption insurance to your needs

Your business is unique, and good business interruption insurance will reflect that fact. These policies should be crafted around the needs of your business in the event that it’s compromised by insured damage to assets. When set up correctly, business interruption insurance will maximise the benefit you and your business will receive should the worst occur.

The bespoke nature of this type of insurance means that it can take various forms, and a business should always take note of policy inclusions, exclusions, and policy wording. There are options to insure:

Your gross profit.
The additional or increased costs of working while you deal with consequences of the insured event.
The loss of rent (if you’re a building owner).
The reasonable cost to prepare your business interruption claim.

The claims preparation cost is an important one. Business interruption insurance tends to deal in large sums. This makes a claim critical, and given the process of preparing said claim isn’t one that the average claimant will be familiar with, a business is advised to seek professional help.

What Are Indemnity Periods in Business Interruption Insurance?

One of the key things to understand about business interruption insurance is the indemnity period outlined in the policy agreement. This states the period during which the cover will apply following the trigger date on an insurable loss - usually when the property damage occurred.

The indemnity period – also known as the period of cover – typically ranges from 12-24 months, though many business interruption insurance policies allow the insured party to specify their preferred period.

The decision on the length of your indemnity period is critical. Consideration should be made for what the expected time is to get your business back up and running – if it is too short, your business may not have sufficient cover to survive an adverse event. A longer indemnity period, on the other hand, will likely come with a higher premium.

Looking for business insurance cover?

Business interruption insurance is sold not as a standalone product but rather as an optional cover that can be included only when you insure your business assets.

Cover your business and ensure its continuity in the face of unexpected events with the right business interruption insurance cover. Contact us now, or one of our distribution partners, to learn more about how we can tailor a business insurance policy to your unique needs and provide the financial security your business deserves.