Business Interruption Insurance for NZ Commercial Properties & Tenants
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Business interruption insurance
A special kind of financial shield designed to help out commercial property owners and the businesses renting space from them when things go sideways. Think of it this way: your standard commercial property insurance pays to fix the building itself or replace damaged contents. But BI insurance tackles a different, equally crucial problem: the financial hit you take from not being able to operate, often called operational downtime, while repairs or rebuilding are underway.
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In New Zealand, with our unique mix of risks – from the ever-present threat of earthquakes to everyday issues like fires or floods – BI cover isn’t just a ‘nice-to-have’; it’s a cornerstone of solid business protection. The money lost and the ongoing bills during a long closure can often be far more damaging than the cost of the physical repairs themselves. Without the right BI protection, even a temporary shutdown can, unfortunately, lead to a permanent one.
When your commercial property gets damaged, the road to full recovery can be much longer than just the time it takes to patch things up. Throughout this recovery journey, the financial commitments keep coming – rent, mortgages, supplier payments – even when normal income has dried up. Business interruption insurance is designed to bridge this scary financial gap. It can provide funds to cover those ongoing fixed expenses, protect your profit margins, help cover wages to keep your valuable team together, and even fund extra costs you might incur to get back on your feet faster.
For anyone involved with commercial property in New Zealand – whether you own the building, run your business from it, or lease space as a tenant – this financial protection is especially critical. Major events like earthquakes can force businesses to close for years, not just months. That’s why picking the right BI cover, especially the ‘indemnity period’ (which defines how long the cover lasts), is so vital to make sure you’re supported throughout the entire recovery process.
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The specifics, or terms and conditions, of BI policies can change a lot depending on the type of commercial property – a bustling retail shop has different needs than a large industrial site or a building with a mix of tenants. And figuring out how much cover you need means looking carefully at things like seasonal income swings, your growth plans, market trends, and the specific way your business (or your tenants’ businesses) operate. Kiwi commercial property owners and tenants face some particular hurdles here. Factors such as stringent building code requirements, a shortage of contractors in some areas, or even hiccups in the supply chain for building materials can all drag out recovery times much longer than you might see elsewhere in the world.
This guide will walk you through the must-knows of Business Interruption insurance for both commercial property owners and tenants in NZ. We’ll cover what it typically includes, how to choose that all-important indemnity period, how to get your financial calculations right for the sum insured, what the claims process looks like, and some smart strategies to make sure your protection is really working for you. Get a good grip on these elements, and you’ll be in a much stronger position to protect your income stream and keep your business (or your tenants’ businesses) going, even when unexpected disruptions hit.
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With same day turn around and access to 30+ different insurers, Gerrards are your small business insurance experts.
What is Business Interruption Insurance, and Why Do Owners and Tenants Really Need It?
Business Interruption insurance is a financial lifeline that compensates businesses for lost income and covers ongoing expenses when they cannot operate normally due to physical damage to the commercial property they own or occupy. This coverage activates when an insured event – like a fire, flood, earthquake, or major storm – causes property damage that forces a temporary shutdown or significantly scales back operations. It’s crucial to remember it’s different from building insurance (which pays to repair the structure) or contents insurance (which pays to replace damaged goods and equipment).
BI insurance specifically tackles the financial fallout of that operational downtime. For commercial property owners and tenants in New Zealand, BI cover serves as a critical safety net. It bridges that often-massive financial chasm between the moment the property gets damaged and the point when it’s fully up and running again. Imagine a retail building is badly damaged by fire. The building insurance will cover the cost of repairs. But what about the shop owner’s lost sales, or the landlord’s lost rent, while the shop is closed for months? That’s where BI insurance steps in. This protection is incredibly valuable in the New Zealand market, where the risk of natural disasters can make businesses particularly vulnerable to long closures.
As Marcus Wolton, a Chief Broking Officer at Gerrards Insurance, puts it, “Business interruption insurance works in tandem with your commercial property insurance. Your building coverage repairs the physical damage, while business interruption coverage protects the financial health of your operation during recovery.” BI insurance can be triggered in several situations, often going beyond just direct damage to your own building. These typically include:
- Physical damage to your commercial building that stops you (or your tenants) from operating normally.
- Denial of access – if the authorities cordon off the area due to a nearby disaster, even if your own building isn’t directly hit.
- Damage to neighbouring properties that physically blocks access to your business or makes it unsafe to operate.
- Supply chain disruptions – if damage at a key supplier’s premises means you can’t get the materials or goods you need to function (this cover can be specific, so check your policy’s terms and conditions!).
- Utility failures (power, water, gas) if they are caused by a covered peril damaging the utility provider’s infrastructure.
How does this apply to different parties?
- For commercial landlords (property owners): BI insurance can protect your rental income stream if your tenants are forced to move out because of damage.
- For owner-operators (you own the building and run your business from it): It provides essential funds to keep your business financially stable while you rebuild and recover.
- For tenants leasing commercial space: Your own BI policy is vital. It can cover your lost business income, ongoing expenses (like rent if your lease requires you to keep paying even when you can’t use the space), and the extra costs if you’re forced to relocate temporarily – think higher rent at a short-term spot, moving costs, or fitting out a temporary space. This is crucial because the landlord’s insurance won’t cover your business losses.
Without this kind of cover, even businesses with solid building insurance can face severe financial strain or even collapse during a long recovery. This is especially true in that landlord-tenant relationship – both parties have distinct financial interests, but they’re also interconnected. If a tenant’s business fails due to a long interruption, the landlord loses a tenant. Proper BI cover for both can help keep the whole commercial ecosystem more stable after a disaster.
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 0.1 to 0.5% of the amount you wish to insure
What Does Business Interruption Insurance Actually Cover for Owners & Tenants?
Business Interruption insurance provides extensive financial support when business operations are disrupted due to property damage, going beyond merely replacing lost income to address a wide array of financial challenges. For Property Owners (Landlords & Owner-Operators), BI insurance typically covers:
- Lost Profits and Revenue: This is the primary coverage, aiming to restore your financial position to what it would have been without the disaster. Calculations are based on historical financial records, adjusted for growth trends and seasonal variations. For instance, a retail property owner might be compensated for lost income during a peak trading period like Christmas, while an industrial property owner might receive funds to cover income tied to production quotas.
- Fixed Operating Expenses: These are the ongoing costs and expenses that continue even when your business is closed. Examples include:
- Mortgage or loan payments on the commercial property.
- Council rates and property taxes.
- Ongoing insurance premiums.
- Equipment leasing costs.
- Contractual obligations that cannot be suspended.
- Essential utility services (e.g., power to maintain security systems).
- Employee Wages: A significant benefit for many businesses, BI can cover wage expenses during the shutdown, helping you retain valuable staff and ensuring a smoother reopening.
- Relocation & Temporary Operating Costs: If you need to operate from a temporary location, the policy can cover associated costs such as:
- Rent for the temporary premises.
- Moving and setup expenses.
- Additional advertising to inform customers of your new location.
- Increased running costs at the temporary facility.
- For Landlords Specifically: Beyond their own property-related expenses, coverage can extend to:
- Lost rental income if tenants cannot occupy the damaged premises.
- Costs of finding temporary accommodation for tenants (if stipulated in lease agreements).
- Legal fees for lease amendments or disputes arising from the disruption.
- Ongoing property management costs.
- Marketing expenses to find new tenants if existing ones cannot return.
For Tenants Leasing Commercial Space, your BI policy typically helps with:
- Your Own Lost Business Income/Profits: Similar to an owner-operator, this covers the income your specific business loses due to the inability to operate from the damaged premises.
- Ongoing Rent Payments: If your lease agreement mandates continued rent payments even when the building is unusable, your BI policy can cover these costs.
- Increased Costs of Working from a Temporary Space: If renting temporary premises is more expensive than your usual lease, BI can cover the difference in rental costs.
- Moving & Relocation Expenses: This includes the costs of packing, transporting, and setting up your business operations in a temporary location and then moving back once repairs are complete.
- Modifying Temporary Space: Costs associated with making necessary alterations to a temporary space to suit your business’s operational needs.
- Customer Communication Costs: Expenses incurred in notifying your customers about your temporary relocation and how to continue accessing your services or products.
- Lost Income at Temporary Location: If the temporary location results in reduced business (e.g., due to lower foot traffic or less visibility), BI may cover this shortfall in income.
As Marcus Wolton, wisely notes, “The most valuable aspect of business interruption coverage is its flexibility. It provides funds for the additional expenses required to get your business back up and running faster, potentially in a modified capacity. This might include expedited shipping, overtime pay, or technology solutions that allow partial operations during rebuilding.” When both landlords and tenants have well-structured BI policies, it helps maintain financial stability for the entire commercial ecosystem, ensuring that neither party bears disproportionate financial strain during the recovery process.
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With same day turn around and access to 30+ different insurers, Gerrards are your small business insurance experts.
Understanding Indemnity Periods: How Long Does Your Financial Support Last?
The Indemnity Period is arguably THE most critical component of your Business Interruption insurance policy, and it’s where businesses often get caught out if it’s not chosen carefully. Simply put, the indemnity period is the maximum length of time your policy will continue to pay out benefits after a covered loss occurs. It’s effectively the ticking clock on your financial recovery support from the insurer. In the New Zealand commercial property market, you’ll typically see indemnity periods ranging from 12 to 36 months, though longer periods are often available and advisable for complex situations. This clock generally starts ticking from the moment the physical damage happens, and it keeps going until your business is back to its normal operational level or the indemnity period expires – whichever comes first. Choosing the right indemnity period isn’t a guess; it requires serious, realistic thought about how long your specific business might take to fully recover.
Key Factors for Property Owners (Landlords & Owner-Operators) to Consider for Indemnity Period Selection:
- Building Complexity and Specialized Equipment: Is your building straightforward to repair, or does it have complex features or specialized equipment that will take a long time to replace or reinstall? Heritage buildings, for example, often have much longer restoration times.
- Local Authority Approval Timeframes: How long do resource consents and building permits typically take to secure in your region? These administrative processes can add significant delays.
- Availability of Contractors and Materials: Are skilled contractors and necessary building materials readily available in your area, or could there be shortages, especially after a widespread event?
- Seasonal Factors: Could seasonal weather patterns delay construction or affect your business’s ability to ramp back up?
- Supply Chain Vulnerabilities: Are there potential disruptions in the supply chain for critical materials or equipment needed for your property or business operations?
- Time to Restore Customer Base and Market Position: How long will it realistically take to regain your customers and return your business to its pre-loss turnover and profitability?
- Historical Recovery Patterns: What have been the actual recovery times for similar businesses or properties in New Zealand after major insurable events?
Cohen Crowder, a commercial property insurance specialist at Gerrards, warns, “The most common mistake we see is commercial property owners significantly underestimating recovery timeframes. They focus on the physical rebuilding period without accounting for the cascading delays that often occur—resource consent approvals, engineering assessments, contractor scheduling, supply chain disruptions, and the ramp-up period once the property is rebuilt.”
Key Factors for Tenants Leasing Commercial Space to Consider for Indemnity Period Selection:
- Landlord’s Rebuilding Timeline: Your recovery is dependent on your landlord’s repair schedule, which you don’t directly control. Factor in potential delays on their end.
- Reinstallation of Equipment and Fit-out: How long will it take you to reinstall your specialized equipment, complete your shop fit-out, and get your IT and operational systems back online once the basic structure is repaired?
- Re-establishing Customer Base: If you’ve been closed or operating from a temporary, perhaps less ideal, location for an extended period, how long will it take to win back your customers and rebuild your sales pipeline?
- Seasonal Business Cycles: If your business has significant seasonal peaks (e.g., retail at Christmas, tourism in summer), missing a peak season due to disruption can mean it takes a full year or more to recover that lost ground financially.
- Inventory and Stock Replenishment: What are the lead times for replacing your unique stock, raw materials, or restarting your manufacturing process?
- Staff Retraining or Re-hiring: If you’ve lost experienced staff during an extended shutdown, you’ll need to factor in time and costs for hiring and training new team members.
The Danger of Misaligned Indemnity Periods (Landlords & Tenants):
This is a real trap. If a landlord’s BI cover (for lost rent) expires before their tenants can realistically move back in and resume paying full rent, the landlord faces a significant income shortfall. Conversely, if a tenant’s BI cover runs out before they are fully operational in the repaired premises, their business could fail, leaving the landlord with a vacant space and further financial loss. It’s a situation that can negatively impact all parties involved. While longer indemnity periods generally mean higher premiums, that additional cost is often minimal compared to the catastrophic financial impact of having your insurance coverage expire before your business is truly back on its feet. The Canterbury earthquakes provided a harsh lesson for many New Zealand businesses; those with 12-month indemnity periods often found their financial support ran out long before they could reopen or fully recover.
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Calculating How Much BI Cover You Need: Getting the Sum Insured Right
Figuring out the right *amount* of Business Interruption cover, known as your sum insured, requires careful financial forecasting and analysis. It’s not just about your current revenue; it’s about accurately projecting what your financial situation *would have been* if no interruption had occurred, and ensuring all your ongoing commitments and costs are covered during that entire recovery period.
Calculation Approach for Property Owners (Landlords & Owner-Operators):
Your starting point is typically your baseline business income. This involves a few key steps:
Review Historical Financials: Look at your profit and loss statements and balance sheets for the past 2-3 years to establish trends.
Identify Consistent Monthly Fixed Expenses: Pinpoint all the costs that don’t stop when your doors are closed (e.g., loan payments, rates, insurance for the property itself).
Analyze Seasonal Revenue Patterns: If your income fluctuates seasonally, ensure your calculations account for potential losses during peak periods, not just average months.
Project Reasonable Growth: Based on historical performance and market conditions, factor in realistic business growth.
Account for Planned Changes: Consider any planned business expansions, new product lines, or significant changes that were on the horizon and would have impacted income.
If you’re an owner-operator, the calculation needs to cover your anticipated gross profit (which is your total revenue minus the direct variable costs of producing goods or services) plus all those continuing fixed expenses. If you’re a landlord, the primary focus is on your gross rental income and any ongoing property management costs and expenses you’re still liable for. Joshua Kalauta, a commercial risk consultant, advises, “Commercial property owners often overlook the compounding effect of business growth when calculating coverage needs. If your business has been growing at 15% annually, a major interruption in two years would impact a significantly larger operation than what exists today. Your coverage limits need to reflect that projected growth.”
Calculation Approach for Tenants Leasing Commercial Space:
Your calculation will focus on your business’s specific losses and additional costs:
Ongoing Lease Liabilities: What are your continuing obligations under your lease agreement even if you can’t occupy the premises (e.g., rent, outgoings, service charges)?
Additional Costs of Temporary Operation: If you operate from a temporary, possibly more expensive, location, what are the increased rental costs, fit-out expenses, and other operational overheads?
Projected Revenue Loss: How much revenue will your business lose due to decreased customer access, reduced visibility, or general disruption to your sales and services?
Moving and Re-establishment Costs: What are the full costs associated with moving to a temporary site, setting up, and then eventually moving back into your restored premises?
Supply Chain and Inventory Impacts: Will there be delays or increased costs in obtaining your stock, raw materials, or components due to the disruption, and how will this affect your ability to generate income?
Considerations for Landlords with Multiple Tenants:
If you own a building with a diverse range of tenants, your BI calculation should consider:
The varied business types, and therefore the different recovery needs and timeframes, of each tenant.
The specific terms and conditions in your lease agreements regarding disruptions and tenant rights, as these can affect your lost rental income claim.
The potential ripple effect if one or more tenants’ businesses fail due to the interruption – this could impact your long-term rental income and increase vacancy rates for those spaces.
Any additional expenses you might incur to try and retain valuable tenants during a prolonged disruption, such as offering rental concessions once they can return or contributing to their re-establishment costs.
Does business interruption insurance cover COVID-19 or pandemic-related closures?
Standard business interruption policies in New Zealand typically require physical damage to insured property to trigger coverage, which means most policies did not cover pandemic-related closures. The Insurance Council of New Zealand confirmed that most business interruption policies contain specific exclusions for diseases and pandemics. However, some specialized policies with infectious disease extensions provided limited coverage, though often restricted to specific named diseases or temporary closures due to local outbreaks. Recent legal precedents have generally upheld these exclusions, but each policy's specific wording determines coverage. For future protection, some insurers now offer specialised pandemic coverage as separate policies or endorsements, though with significant limitations and higher premiums.
How is business interruption insurance different for commercial landlords versus business owners?
For commercial landlords, business interruption insurance primarily focuses on protecting rental income streams when tenants cannot occupy damaged properties. The coverage typically addresses lost rent, continuing mortgage payments, and property management expenses. The policy may also cover tenant re-establishment costs to encourage businesses to return after repairs. For business owner-operators, the coverage is more comprehensive, including lost profits, employee wages, temporary relocation expenses, and additional costs to maintain operations. Owner-operators must consider their entire business continuity needs, while landlords focus primarily on maintaining their property investment returns during rebuilding.
For commercial tenants who don't own their premises, business interruption insurance focuses on income protection, continued payment of fixed expenses (including rent obligations that may continue despite inability to occupy), and additional costs associated with temporary relocation. Tenants must consider their specific operational recovery needs independent of the landlord's property restoration timeline.
Can I get business interruption coverage without having building insurance?
Business interruption insurance is almost always sold in conjunction with commercial property insurance rather than as a standalone policy. This is because business interruption coverage is triggered by physical damage to insured property, making the underlying property policy a prerequisite. However, some specialised forms of business income protection might be available without standard property coverage, such as contingent business interruption insurance (which covers losses from damage to supplier or customer properties) or non-damage business interruption insurance (which covers specified events like utility failure).
For commercial tenants, business interruption coverage can be purchased as part of their business contents insurance policy, without needing to insure the building itself (which remains the landlord's responsibility). This arrangement allows tenants to protect their business operations without duplicating the building coverage maintained by the property owner.
These specialised policies are relatively rare in the New Zealand market and typically come with significant limitations and higher premiums.
How long does it take to receive payment for a business interruption claim?
The timeline for business interruption claim payments varies based on claim complexity and the specific circumstances of the interruption. Initially, most insurers can provide advance payments within 2-4 weeks of claim filing to address immediate cash flow needs, provided you've supplied basic documentation establishing the validity of your claim. Subsequent payments typically follow a regular schedule (often monthly) based on ongoing financial documentation. Unlike property damage claims that might be settled in a single payment, business interruption claims usually involve multiple payments throughout the recovery period.
For commercial landlords and tenants with interdependent claims, the process may be further complicated by the need to coordinate recovery expectations and timelines. When the property owner's rebuilding schedule affects the tenant's business recovery, insurers may adjust payment schedules accordingly.
For claims with extended indemnity periods, the payment process might continue for many months or even years until your business fully recovers or the indemnity period expires.
