If your business suffered an unexpected disruption such as a fire, flood, or storm, or a major supplier closed because of one of these events, how long would it take to get your business up and running again? And how much would you lose along the way?
Unexpected disasters often bring a sharper focus to the importance of insurance cover. One such insurance cover is Business Interruption Insurance.
When a Business is Unable to Operate
When a business is unable to operate because of a disaster or physical loss of business assets, it still needs to pay for ongoing expenses. These expenses can be anything from staff wages and supplier invoices to rent or loan repayments. If a business cannot operate as usual or meet financial commitments, this is understandably a huge concern.
The Benefits of Business Interruption Insurance
The purpose of Business Interruption Insurance is to help businesses survive when they have been forced to cease trading for a period, usually following a disaster. This type of insurance cover is designed to minimize the financial impact businesses face after a physical loss of business assets. The cover funds operational expenses and injects lost profits into the balance sheet.
Ultimately, Business Interruption Insurance helps businesses stay afloat. It does this by replacing the turnover that is lost while the business ceases to operate, so that it can recover and rebuild in time.
DID YOU KNOW?
$266m
New Zealand incurred $266,340,393 in material damage and business interruption claims in 2017.
(Insurance Council of New Zealand, ‘Understanding Insurance’, 2018)
40%
40% of small businesses must close after a natural disaster
(Federal Emergency Management Agency, ‘Protecting your business’, 2018)
$120m
Insured New Zealand businesses have claimed $120 million over 10 years to 2018 due to flood damage.
(New Zealand Climate Change Research Institute, ‘Estimating financial costs of climate change in New Zealand’, 2018)
Covering Loss of Earnings and Protecting Cashflow
Business interruption insurance can help make sure your business keeps running smoothly after an unexpected event, by covering the turnover that is lost so you can recover and rebuild.
Depending on the policy, business interruption insurance can cover:
- Revenue/income: Income that would have been earned during the period the business cannot operate.
- Fixed costs: Operating expenses and other costs still being incurred by the property (based on historical costs).
- Temporary relocation: The extra expenses for moving to, and operating from, a temporary location.
- Extra expenses: Reimbursement for reasonable expenses (beyond the fixed costs) that allow the business to continue operating while the property is being repaired.
Cover Exclusions:
The excess you need to pay and limits of liability can vary greatly depending on your insurer. To claim under a business interruption policy, the loss must arise from damage to property (buildings, stock, and contents) that was insured, and the property damage must be claimable under that policy.
Business interruption insurance is subject to the same exclusions as those in the policy covering buildings, stock, and contents.
CASE STUDY
Linda is the owner of a small office supplies business with eight staff on the payroll and numerous suppliers.
Late one night, the restaurant next door catches fire and it spreads to her business premises, destroying the property along with the stock and IT systems. She’s unable to open the shop for weeks while the building is being repaired.
Because the business isn’t operating, she’s not making any money; meanwhile, the bills are piling up. With business interruption insurance, Linda can bank an insurance payment to maintain her cash flow at the pre-interruption level.
Linda can continue paying her staff their regular wages, so they keep their jobs. She can also rent a temporary location, so the store keeps running.
Finding the Right Business Interruption Insurance Cover for You
Many business owners in New Zealand have learnt first-hand how unexpected events can have a significant and severe impact on business. Many have been caught off-guard by natural disasters and other events, leaving them ill-equipped to deal with the consequences.
While life in post-pandemic New Zealand is largely business as usual, elsewhere that’s not the case. COVID-19 provides a timely reminder of how life and livelihood can change in an instant.
A robust Business Interruption Insurance policy helps ensure business continuity even in tough times. To find out more about Business Interruption Insurance, contact Astute Insurance NZ.
– Jay Areora