Christchurch business owners unlucky enough to be caught in the cordoned-off red zone will know their Business Interruption (BI) insurance policies like the backs of their hands.
For most business owners in other parts of the country, your BI policy may well be treated the same way as other insurance policies – collected out of a dusty filing cabinet and read for the first time after damage is caused. The Canterbury earthquakes have however been a telling lesson that your BI policy needs to be well understood at the time you entered into it.
Generally BI policies are linked to material damage insurance policies. They require physical damage to your property which causes an interruption and a loss to your business. BI should provide you with peace of mind against lost profit, lost rental or increased costs that you could incur when your business tries to get back on its feet.
However, the particular wording of the BI policy is of the utmost importance – you need to know exactly what is, and what is not, covered. In the real world it’s easier said than done to wade through over 20 pages of small type when you’re busy, but our Christchurch experience has shown it’s crucial. For example, will you be covered if access to your business is disrupted because of a government- imposed cordon, not because of physical damage? Will you be covered while your property damage is being repaired? Will you be able to recover if all of your clients’ businesses shut down? And will you be covered for multiple events?
These questions need to be understood so you know what risks you are actually insured for. Having a good insurance broker certainly helps as they specialise in obtaining the right type of cover for their clients and advocating for those clients when it comes time to make a claim. There’s also a place for lawyers and accountants as advisers to ensure you understand whether your BI policy will actually cover you and to put forward a well- presented claim when needed.
Other BI issues that have come out of recent disasters such as the Canterbury earthquakes, North Island volcanic eruptions of a few years ago, and floods at the top of the South Island are indemnity periods and depopulation.
The indemnity period is the time period for which BI policy will endure. It’s often 12 months in New Zealand. If, say, your business continued to trade immediately after an insured event in the expectation that you could claim when you later shut down for needed repairs, you may be in for a shock. The indemnity period will usually start from the date of the damage, not from when you closed down at a later time, even if that’s necessary or repairs take far longer than anticipated to get started.
Exactly what you may recover from your BI insurance is also an issue for many. Policies often exclude the effects of a drop in client base due to clients leaving the area after a disaster. This is known as depopulation and insurers will often argue its effects are not covered. This is not always the case and, again, the wording of your policy is important here.
Overall, the most important pitfall of BI insurance is not taking the time to read and fully understand the policy or to seek further advice on it. At the end of the day your insurance is intended to give peace of mind against financial risk. The danger is if you let ignorance be bliss.
Rachael Robertson is a partner in Christchurch law firm Corcoran French. Information given in Your Law is not a substitute for legal advice.