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Business Interruption Insurance

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Business interruption insurance

This is a type of coverage that helps businesses cover lost income and extra expenses due to unforeseen events that disrupt normal operations. These events could include things like fires, floods, or other disasters. The ultimate aim is to put your company in the same financial position it would have been in if the disruptive event never occurred.

Why is business interruption insurance important? 

Loss of business income or business interruption insurance protects you against common risks of owning and operating a business.

Business interruption insurance is important because it helps businesses navigate unforeseen disruptions, such as natural disasters or equipment damage, that can halt operations. Regular business insurance typically covers physical damage to your property but doesn’t compensate for lost income during downtime. Business interruption insurance fills this gap, offering financial support to help maintain your business during challenging periods, protecting profits, and covering operational expenses.

Business interruption insurance serves as a safety net, helping you manage these risks and ensuring that unexpected incidents don’t derail your business. Its affordability makes it a wise investment. In New Zealand, the average cost of business interruption insurance typically ranges between NZ$60 – NZ$200 per month. 

It’s crucial to have this coverage if your business:

  • Has business premises

  • Incurs operating expenses

  • Relies on specific equipment.

  • Has a complex supply chain.

  • Is in a limited access area that can have street closures

What does this cover?

Business interruption insurance covers three key areas: gross profits or loss of income, additional increased costs of working or extra expenses, and claims preparation costs.

Gross Profits or Loss of Income

This aspect of coverage concerns the income your business operations would have earned if the disruption had not occurred. It's calculated based on your company's financial records and includes expected profits and standard operating costs. By covering this, business interruption insurance helps you maintain your financial stability, even when operations are at a standstill.

Additional Increased Costs of Working or Extra Expenses

These refer to the reasonable and necessary costs your business might incur during the recovery period that wouldn't have been necessary if the disruption hadn't happened. This could include expenses for temporary closure & relocation, additional staff overtime, or the costs to expedite the replacement of machinery or equipment. By covering these costs, business interruption insurance helps your business return to normal operations as quickly and efficiently as possible.

Claims Preparation Costs

Filing a claim can be a complex process that might require the assistance of accountants, loss assessors, or other professionals to accurately calculate and present your loss to the insurance company. Business interruption insurance can cover these professional fees, ensuring that the claim process doesn't add to your financial burden during a challenging time.

How much does business interruption insurance cost in NZ?

Business interruption insurance premiums are calculated on several different factors including:

  • Type of business
  • Sum insured
  • Location 
  • Indemnity period

Business interruption insurance in NZ typically costs between $60 to $200 per month. 

Who needs business interruption insurance NZ?

While any business can benefit from business interruption insurance, it is particularly beneficial for businesses that:

  • Have physical locations that customers need to access.

  • Rely on specific machinery or equipment to operate, such as manufacturers.

  • Operate in areas prone to natural disasters like earthquakes, floods, or severe storms.

The length of coverage, known as the “indemnity period,” varies based on the specifics of your policy. Typically, it starts from the time the interruption occurs and lasts until your business is back to operating as it was before the event. This period can range from a few months to a couple of years. It’s essential to select the appropriate indemnity period as once this period ends, there is no more business interruption cover.

This greatly depends on the specifics of your policy. Most policies exclude coverage for infectious diseases and pandemics, while others might offer it as an optional extra. It’s always best to thoroughly review your policy or consult with your insurance broker to understand what’s covered.

How do I get proof of business interruption insurance?

You can usually get proof of insurance same day when you purchase business interruption insurance through Gerrards.

Acquiring business interruption insurance from traditional insurance brokers may require a few weeks, a delay that could create problems for policyholders who need instant insurance proof of business interruption insurance for a contract. 

To obtain insurance coverage promptly, contact us. We may require you to provide some fundamental details about your business, such as:

  • The name of your business

  • Your financial statements

  • The industry you operate in 

  • Business continuity strategy

  • Your claims history

What does business interruption insurance not cover?

There are certain key areas where business interruption insurance may not provide coverage:

Pandemics or infectious diseases

As mentioned earlier, some policies exclude pandemics and infectious diseases. If your business is highly susceptible to disruptions from such events, you may want to consider a policy that offers this coverage or an endorsement that adds it to your existing coverage.

Undocumented income

Insurers typically base payouts on your documented income. If your business earns undocumented income, it won’t be considered in your loss calculation.

Losses from closures due to government or regulatory actions

Unless specifically outlined in the policy, losses due to closure mandated by government or regulatory actions are not typically covered.

Roadworks

A drop in business income due road works blocking off part or all of your premise are common. Unfortunately even though this is an unforeseen event, this is not a peril covered by business interruption insurance.

Other common questions about loss of business income insurance NZ

There’s no difference – these are two terms for the same coverage.

No, business interruption policies are triggered by a loss under a material damage or business assets policy. If there is no property damage the business interruption policy can’t respond. This means you’ll need to purchase both policies together. There are of course exceptions to the rule such as forced closures due to natural disasters or transport route interruptions however you are still required to purchase a material damage policy to have this cover.

Claims are calculated based on the profits that your business would have made during the period of interruption, based on previous financial statements, as well as the extra expenses incurred due to the interruption. A specialist business interruption accountant or loss adjuster will look at the financial loss and difference in revenue from the period the loss has occurred in contrast to previous periods. From there they can calculate the profit lost and pay any additional expenses.

Yes, it can cover staff wages to help the business owner retain your employees during the interruption period. Do note that if the employees aren’t essential then you may be forced to let them go. This is because the company will want to reduce ongoing costs and alleviate pressure on the cash flow whilst your business can’t or is trading in a reduced capacity following an insured event.

The timeframe varies depending on the insurer, the complexity of the claim, and the specific circumstances. However, it’s common for initial payouts to be made within a few weeks of a claim being accepted. These initial payments will be for paying ongoing expenses and helping the business meet it’s short term financial obligations such as loan repayments and shifting to temporary location.

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