The recent flooding in Canterbury caused extensive damage to farms and other businesses that will impact business revenue for many over the coming months.
Physical loss and damage to property due to flooding will usually be covered by your material damage policy (buildings, contents and stock) and your motor vehicle policy. For farmers, specialist livestock and/or crop policies will apply. Of course, if you have lost the season's harvested crop or fodder crops, the financial impact will be more significant than just the loss of the crop itself. This is where Business Interruption (BI) insurance can help.
BI insurance is usually bought together with property insurance (material damage cover, livestock or crop cover) and covers loss of revenue, profit or rent as a result of an insured peril. The trigger for cover is an unforeseen physical loss or damage (e.g. flooding) to insured property, or property used by the business, which causes interruption or interference to the business. The BI policy will cover resultant financial loss.
Conceptually, loss of profit insurance is simple. It covers the reduction in turnover and the increased cost of working during the period the business is affected. It is applicable during the indemnity period, up to the sum insured. The indemnity period and the sum insured will be shown on the policy schedule. Common BI insurance cover can include:
- Loss of Gross Profit
The shortage of turnover is usually calculated by multiplying the rate of gross profit (generally established by the previous financial year's figures) by the shortage of turnover as a result of the event. This usually includes reasonable costs you incur to avoid or reduce the shortage of turnover that you would otherwise suffer.
- Additional Increased Costs of Working
Costs you incur to resume or maintain normal operations to avoid or mitigate the loss of profit.
- Other Covers
Most BI policies include cover for claim preparation costs so that your business can get professional help (e.g. accounting assistance) in preparing and presenting your BI claim. This will have a sub-limit, often around $10,000. There is also often BI cover for paying wages to retain your key staff until your business can resume normal operations.
Your BI insurance may have a stand-down period, or the ability to defer the indemnity period. For example, if a delay in repairs will negatively impact business performance. Ultimately, your BI cover depends on your policy wording and any relevant exclusions and endorsements.
Accurate bookkeeping and financial records are key for BI claims, so we recommend keeping a record of all expenditure and involving your accountant and broker early. If you need advice on the impact this latest event has, or will have, on your business, contact your lawyer, accountant and/or insurance broker.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.