Don't Get Burned - The Importance of Business Interruption Insurance

Recently a demolition business owner had three of his trucks destroyed by arson.  Unfortunately, whilst the business has insurance for the damage to the trucks, it has no cover for the business it will lose with three of its fleet out of action.  This has created real difficulties for the business, such that it was reported the owner was considering leaving New Zealand, highlighting the real risks of not having business interruption cover.
As a concept, business interruption insurance is relatively simple.  You pay a premium and obtain cover for the loss of gross profit during a defined period.
 
Cover is triggered through damage to insured property (e.g. the trucks) caused by an event which is insured (e.g. earthquake or fire).  The insured property could be the building from which your business operates, plant, machinery, premises fit out or stock.  However, cover is not triggered even if your business is interrupted because of an insured event, but your business suffered no material damage.

The length of the period of cover depends on the premium paid and should be appropriate for your type of business, but is commonly 12 or 24 months.  Normally, the period will begin on the date of the damage. This is fine if the damage will immediately result in lost profit.  But in some cases, despite the damage, a business is able to operate normally and it may only be at some later date that that business suffers lost profit (say when buildings or premises are being repaired).  However, by this time, the period of cover may have ended leaving you with no cover.  You may be able to negotiate with your insurer (together with your broker, if you have one) different times from which the period of cover will run. 

The cover for lost profit during the period of interruption is calculated using the gross profit for the same period in the previous year, often with some adjustments for trends and particular circumstances.  The actual calculations can, however, be complex and it is important to work closely with your accountant, broker and lawyer to maximise your cover.

Many business owners overlook or do not consider taking out business interruption cover.  However, the demolition business owner above, and many business owners affected by the Canterbury earthquakes, would tell you this is a mistake and of the need to have such cover in place.  There is no saying when and how your business property or plant may be damaged and your business interrupted.  So make sure to review your insurance cover, and, particularly, look carefully at taking out business interruption cover, if you don't already have it.