Business interruption insurance covers an organisation for loss of profits as a result of:
Insured damage (for example, when a customer cancels their contract because you cannot supply)
Needing to cover wages while not trading
Increased costs to restore operations after a significant event
It also covers the cost of getting outside professional assistance with your claim.
For business interruption cover to apply you must have sustained physical damage to your insured business operations (which you should claim for under your material damage policy) unless there is specific sub-limit cover provided which is discussed below.
Understanding your policy
There are many nuances with business interruption cover, including different cover for different sectors (general commercial, landlord, horticulture etc.), so it is important that you understand your policy and entitlements, including how this relates to your current position and outlook.
Key components that are contained in your policy schedule and policy wording and are important to review and understand include:
That your policy is still current
Your indemnity period - how long you are covered for
Structure of the policy - what specifically you have cover for
Your cover limits - maximum values you are able to claim, including claims preparation costs, and what cover is in place for each location/site (if you have multiple)
Any exclusions
Your business interruption cover may have ‘sub-limits’ which cover organisations when they have limited or no immediate material damage, but are not able to trade at full capacity because of external factors such as closure of transit routes or ports, or restricted access to sites (e.g. a warehouse is unable to obtain stock to supply a customer). This could mean that even without material damage, you could still have cover (although often less cover) under your business interruption insurance.
This is really important for businesses around NZ that were not directly impacted by the recent weather events, but are still unable to trade at full capacity.
What you need to do
Your broker is your primary connection with the insurance underwriter. They should act as your advocate and play a key support role throughout the process. Ensure you appoint an external advisor to assist with the claim preparation and let the underwriter know. In most cases, you have already paid for this support under your business interruption policy - make sure you get all the assistance you are entitled to.
Claim process
Lodge an initial claim with your insurer or broker promptly (without specifying an amount being claimed).
Request that an upfront progress payment is made (note, you will need to have a high-level view of the value of the claim).
Ensure you act in a manner to minimise the extent of the overall loss (your insurer has the same obligation).
Request copies of your current business interruption and material damage policies (if you don’t have them on hand already). Review your claim limits, exclusions and key time periods.
Work with your broker and advisor to prepare a comprehensive claim reflecting the full extent of the loss, including any recurring impact to business efficiency and savings that may occur for the duration of the claim period.
You should speak with your broker as soon as possible, notify them that you wish to make an initial claim submission and request an upfront progress payment to receive an early cash injection. This can be a critical cash boost to help when you are likely to be facing very challenging trading positions. For example, helping to maintain ongoing wages and rent payments. However, do not rush the actual claim, as it is important to get all the proceeds you are entitled to.
The insurance underwriter will appoint a loss adjuster, who acts on behalf of the insurance underwriter (not you) to assess the claim. Your broker and external advisor should connect with the loss adjuster. Do not just allow the loss adjuster to finalise the claim without seeking input and review from your broker and advisor.
Your claim will need to provide evidence of profit lost, any additional costs incurred, and your claim support costs. Consider photos to show the impact and damage to your business and maintain a record of key events and the timeline after damage has occurred.
Claim calculation
Take time with your calculation and consider all sources of lost income and additional costs (plus any savings).
When considering the impact on your business and lost revenue, take into account the broader impact on your profit for the full period of indemnity. Be aware that a general decline in trading (not caused by the insured damage) is not covered under your business interruption policy.
There are five key components to the overall claim:
Your reduction in gross profit
Wages paid that can be claimed
The increased costs of working (either to restore operations or due to inefficient operations post-event)
Savings in operating costs
Claims preparation costs that are covered by your policy
Identify the estimated cost of preparing the claim. You may need approval from your broker or loss adjuster before engaging an external advisor.
Use your cover to appoint an advisor to help you prepare the claim. The cost is likely to be covered, and the use of professionals may increase the weight and validity of your claim when it is reviewed by loss adjusters.
Reopening your business
When you consider reopening your business, remember the following:
You have an obligation to restore business operations as quickly as possible to minimise loss
Plan your reopening thoroughly (and don’t rush it) so that you open as efficiently as possible
Depending on your cover, carefully consider how and when you reopen your business, as recommencing operations (even at reduced capacity) could impact the value of your claim in a detrimental way
Where additional costs to open are incurred, due to the damage sustained, it is important that these are claimed from the insurance underwriter under your business interruption claim
Speak to your broker, advisor and eventually the underwriter about all your costs
Underwriters have the same goal as you - to restore operations as quickly as possible. Stand up for what is owed, but be commercially aware, as claims are a mix of science and art and aim to predict what your earnings would have been without the business interruption event. Do not rush the process or allow a loss adjuster on site until you, your broker and your advisor are ready.
Synchronise your material damage and business interruption claims to ensure that nothing falls through the gaps, and be aware that the payment of claims may not align with when those payments are taxed. Speak to your broker or advisor if you have any questions.
How we can help
Through our support and response to the Canterbury and Kaikoura earthquakes, PwC has developed extensive expertise in assisting clients to understand their business interruption insurance cover, supporting the preparation of claims that maximise the client’s entitlement, and acting as the client advocate with loss adjusters and insurers.
We have prepared in excess of 140 earthquake focused business interruption claims and are one of the most experienced business advisors in this area outside of the insurer appointed loss adjusters. Claims have ranged in size from just under $100,000 through to multi-million dollar claims.
We act as the independent client advocate to deliver the best outcome for our clients. This frequently involves liaising with loss adjusters to ensure they adequately understand a client’s position. We can also, where appropriate, work with a client’s insurance broker.
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