Business Interruption Insurance

What is Business Interruption Insurance?

Business interruption insurance compensates you for the income your business loses when an insured event prevents normal trading. It is designed to be used alongside material damage insurance — your material damage policy pays to rebuild or replace your physical assets, while your BI policy replaces the income you would have earned during the rebuilding process.

Without BI cover, you may find yourself in the position of having a fully insured building being repaired — but no cash flow to pay staff, rent, loan repayments, or operating costs during the months that repair takes. BI bridges this gap.

How Business Interruption Insurance Works

When an insured event (fire, flood, earthquake, major equipment failure) disrupts your operations, your BI policy compensates for:

1. Lost Gross Profit The revenue you would have earned, minus variable costs you save during the closure (materials, production inputs, sales commissions). This is the core BI payment.

2. Fixed Costs Ongoing expenses that continue regardless of trading: rent, rates, loan repayments, minimum staffing, utilities. These are typically included within the gross profit calculation.

3. Increased Costs of Working Extra expenses you incur to maintain or speed up recovery: temporary premises, equipment hire, overtime, expedited freight, outsourced production. These help you restore trading faster, which ultimately reduces the total claim.

4. Claim Preparation Costs Accountant fees, specialist reports, and other costs incurred in preparing and evidencing the BI claim. These are typically covered as a separate item.

The Indemnity Period: The Most Critical Decision

The indemnity period is the maximum time over which the insurer will pay BI losses. Common options are 12, 18, or 24 months. This decision is critical — and getting it wrong is the most common BI mistake.

New Zealand experience tells us:

Canterbury Earthquakes (2010–2011): Many businesses took 18–36 months to fully recover. Businesses with 12-month BI periods ran out of cover while still in recovery.

Cyclone Gabrielle (2023): Supply chain disruption, access restrictions, and workforce displacement meant recovery in affected areas took far longer than a standard 12-month period.

Why 24 months is usually recommended: Recovery from a major insured event — particularly for businesses requiring building reinstatement, plant replacement, or supply chain rebuilding — almost always takes longer than initially estimated. Add building consent delays, contractor availability, and equipment lead times, and 24 months is typically the minimum prudent period.

For manufacturing businesses with long-lead-time plant and equipment, 36 months may be appropriate.

Avoiding Under-Insurance

BI under-insurance is a significant and common problem in New Zealand. If your sum insured (typically annual gross profit) is less than your actual gross profit at the time of a claim, your insurer may apply proportional averaging — paying only the proportion of your loss equal to the proportion you are insured for.

Example: If your actual annual gross profit is $1.5 million but you insured for $1 million, you are 67% insured. A $500,000 loss would result in a payment of only $333,000.

An accurate, up-to-date gross profit calculation is essential. Work with your accountant to calculate BI gross profit correctly — it is defined differently from accounting gross profit and should reflect the revenue available to pay fixed costs and generate profit.

Extensions Worth Considering

Contingent Business Interruption

Covers losses when a key supplier or customer suffers an insured loss at their premises. For manufacturing businesses with sole-source supply chains, this is often the most significant BI risk. For retail businesses dependent on key supplier relationships, it addresses disruption even when your own premises are undamaged.

Utility Interruption

Covers losses from extended power, water, or telecommunications outages caused by damage to utility infrastructure — not your own premises. Post-Cyclone Gabrielle, the significance of utility interruption cover became clear for businesses in affected regions that lost power for weeks.

Prevention of Access

Covers losses when your premises cannot be accessed due to damage at nearby properties — a scenario that arises frequently in central business districts after fires, structural damage, or emergency evacuations.

Government Closure

Some policies offer extensions for losses from government-ordered closure that are not related to physical damage to your premises. Note: standard BI policies excluding COVID-19 and pandemic events remain the norm; confirm your position explicitly with your broker.

BI for Specific Business Types

Retail and Hospitality

Retail and hospitality businesses are typically highly premises-dependent. A forced closure from fire, flood, or equipment failure immediately stops revenue. BI is an essential companion to commercial property insurance for any premises-based business.

Manufacturing

Manufacturers face revenue loss from both physical damage and machinery failure. Machinery breakdown BI (covering losses from sudden equipment failure without physical property damage) is an important extension. Supply chain contingent BI is also critical for manufacturers relying on specialist component suppliers.

Professional Services

Professional services firms with fixed overheads (office leases, staff costs, technology subscriptions) need BI to maintain financial commitments during a period when they cannot operate. For practices with predictable recurring revenue, BI is straightforward to structure.

Technology Companies

Technology businesses face BI exposure not just from physical events but from cyber incidents. A ransomware attack that takes systems offline for weeks generates revenue loss just as a fire would. BI is a key component of cyber liability coverage, but the triggers and terms may differ — confirm with your broker.

How BI Premiums Are Calculated

BI premiums are based on:

• Sum insured (typically annual gross profit): Higher sums insured attract proportionally higher premiums
• Indemnity period: Longer periods cost more (roughly proportionally)
• Industry risk: Higher-risk physical environments attract premium loadings
• Underlying material damage insurer: BI is typically written by the same insurer as your material damage cover

Annual BI premiums typically represent 0.1%–0.5% of the sum insured. For a business with $2 million annual gross profit insured on a 24-month basis, expect $4,000–$20,000 in annual BI premium depending on industry and risk profile.

See also: commercial property insurance, cyber liability insurance, and industry guides for manufacturing, retail and hospitality, and professional services.