The below article outlines some of the lessons learned about business interruption insurance following the Christchurch Earthquakes and was originally published by Rob Stock of Fairfax Media.
Businesses operate in a perilous world. Like households they can be hit by all kinds of interruptions to their operations. Fires, floods, earthquakes... all can bring business as usual to an end. Once a business is unable to trade, it starts dying, and the longer it is out of action, the more of its customers just have to get on and find somebody else to deal with.
In a bid to survive such interruptions, businesses buy a form of cover called "Business interruption" insurance, or BI cover as its known in the industry.
But one influential insurance advisory group- The Lion Partnership New Zealand- thinks many businesses have learnt little from the sufferings of businesses after the Christchurch earthquakes.
John Prendergast, managing partner from the Lion Partnership, said it had undertaken numerous insurance reviews for clients on both sides of the Tasman and it found many had inadequate BI cover.
What's the problem?
Prendergast said BI was there to cover the loss of profits a business may suffer as a result of an interruption like a natural disaster. The level of cover a business had should be sufficient to leave it in a position where it was no worse off than had the disaster not struck.
Once triggered by an insured event like an earthquake destroying a factory, the clock starts ticking. If BI cover has been put in place with an "indemnity period" of 12 months, that's how long lost profits are covered for.
And 12 months does seem to be what many business owners are choosing.
What were the lessons of Christchurch?
One is that business interruptions can be very long. Prendergast said: "It is the experience of the Lion Foundation that most businesses opt for an insufficient period of indemnity, 12 months being a normal timeframe, which is often, as some Christchurch businesses have found, is woefully inadequate."
How do I know if I have the right amount of BI?
The only way to make an informed decision is to get advice. Businesses should review their insurances regularly, and getting an adviser to review your business' cover is a smart move.
It can be hard for business owners to actually understand the risks they face. If you have never had to rebuild a factory after a fire, it's tough to know how long it will take to get through the design, engineering, consenting and rebuild.
Won't my broker just try to sell me more cover?
Probably, but what you will get is advice which you are free to do with what you will. Even if a business owner decides their current level of cover is adequate, they have at least been given food for thought, and should have a better grasp of what they are covered for. They might also learn a bit about how the claims made in Christchurch panned out for the city's affected businesses.
An insurance review can also throw up other surprises. A good adviser can help a business assess the risks it faces, and the ways it can mitigate some of them.
Because you've built a valuable asset, and it'd be a shame to see it ruined by the slings and arrows of outrageous fortune.