Business Interruption: The Forgotten Policy

Say the words “Business Interruption Insurance” to the majority of New Zealand business owners and you’ll probably have them running for the door quicker than you can say tax returns are due.
The perception is that Business Interruption Insurance is a policy pulled out by insurance brokers in order to do a little more business.
Unfortunately, as we’ve seen since Christchurch’s two devastating earthquakes, too many people believe that’s the truth. Largely though, that’s because they don’t understand the true purpose of the policy, what effect it can have on saving a business in a crisis, and just how truly crucial it is.
So what actually is a Business Interruption policy, what does it do and how is it relevant to you and your business?
Put simply, Business Interruption Insurance is a policy that works hand in hand with property policies – both contents and building. The purpose of it is for your business to survive a major loss which causes your business to cease trading for a period of time.
What is important to understand is that property insurance policies – both contents and building – are designed to replace quantifiable items such as your stock, your office equipment, or even the building you operate in and possibly even own.
These policies, however, do not ensure the survival of your business, merely your capacity to operate once the status quo has been restored.
And it is the status quo that Business Interruption Insurance focuses on – things such as gross profit, staff wages, book debts and increased costs from an insurable loss.
When you suffer a loss your business trading could very well grind to a halt, regardless of whether you’re in manufacturing, wholesale, retail, finance or agriculture. Without a doubt all industries are vulnerable to interruption no matter how big or small.
As a result of an interruption you may be forced to close the doors for a short time or for good, unless you can continue to cover your debts, afford a new place to work out of and keep your staff employed. And let’s face it, a lot of businesses, particularly small ones, can’t.
Gross profit can be covered to ensure that if your business is ‘out of action’ for a period of time you can continue to meet your obligations and keep the company running.
It could be two weeks, two months or even six months, but the policy is designed to work in such a way that should disaster strike, it will cover the lost revenue over the period of time that has been insured and therefore keeping your business viable.
Without a Business Interruption policy many business will be forced to shut up shop, rather than continue, because the cost of trying to keep their heads above water is just too high.
Many businesses in Christchurch are discovering that now. The banks may not lend the money needed and the costs associated with getting the business up to its previous level of trade are simply too high.
Staff wages can also be very important, particularly because good, skilled labour can be hard to replace.
Your skilled staff will simply not wait around for you to open your doors again – after all, they have bills to pay too.
If the pause to company operations is too long, then the mounting wages owed can become astronomical. And more than likely your staff will end up working for the competition and you will not get them back.
Additionally, the cost of recruiting and training new staff to replace the ones you’ve lost will also have a major impact on your business. Having a Business Interruption policy with wages included can prevent this from happening.
Your business may also need temporary or new premises which will need to be paid for, or ongoing fixed costs which need to be covered off. Both of these issues can be crippling to a business without cash flow.
Unfortunately in New Zealand, Business Interruption Insurance is often viewed as the first thing to be cut when a company is trying to cut costs, or simply not worth spending money on in the first place. Instead, it’s wrongly viewed as a “nice to have” not a “must have”.

But the reality of it is that in order to survive a major loss such as fire, natural disaster, power outage, theft, and many other conceivable scenarios, Business Interruption Insurance is the most important policy a business can have. It is not merely a “nice to have”, it is an indispensible part of your business continuity plan.
So before you think twice about taking out a Business Interruption policy, remember that it could easily be the one thing that saves you your business and your future and your employees their jobs.

Mark Hayes is Director of Auckland business insurance brokers McHarrison Hayes. For more information go to www.mccarrisonhayes.co.nz