Business Interruption Insurance
Protect your business income when operations are disrupted by fire, flood, earthquake, or other insured events. Coverage for lost revenue and the ongoing expenses that don't stop just because your business does.
What Is Business Interruption Insurance?
Business interruption insurance — also known as loss of income insurance or business income insurance — covers the revenue your business loses when it is forced to stop or reduce operations because of physical damage caused by an insured event.
When a fire, flood, earthquake, or major storm damages your premises, equipment, or stock, your material damage policy covers the cost of repairs and replacement. But that is only half the problem. While you are closed or operating at reduced capacity, your revenue drops or stops entirely — yet your fixed expenses keep running. Rent, salaries, loan repayments, and other overheads do not pause just because your doors are shut.
Business interruption insurance bridges that gap. It pays out the gross profit you would have earned during the period of disruption, covering both the lost revenue and the ongoing fixed costs your business must continue to pay.
In New Zealand, this cover is particularly important given the country's exposure to natural disasters — earthquakes, flooding, volcanic activity, and severe storms. The Canterbury earthquake sequence (2010-2011) and Cyclone Gabrielle (2023) showed how businesses can be shut down for months or even years while premises are repaired or rebuilt.
What Does Business Interruption Insurance Cover?
Loss of Gross Profit
Covers the reduction in your gross profit caused by the interruption. This is the core of a BI policy — it replaces the income you would have earned during the indemnity period.
Ongoing Fixed Expenses
Covers rent, employee wages, loan repayments, insurance premiums, and other fixed costs that continue even when revenue stops. Illustrative example: a cafe closed for 4 months after kitchen fire damage still owes $8,000/month in rent and staff wages.
Additional Increased Cost of Working
Extra expenses incurred to minimise the loss — such as renting temporary premises, hiring replacement equipment, or paying for express delivery of stock to resume trading faster.
Customers and Suppliers Extension
Some policies extend cover to losses caused by damage at a major customer's or supplier's premises that interrupts your business — even if your own property is undamaged.
Denial of Access
Covers lost income when you cannot physically access your premises due to damage to neighbouring properties or civil authority orders — such as a building cordon after an earthquake.
Utilities Failure
Some policies cover loss of income when essential utility services (power, water, gas, telecommunications) are interrupted due to physical damage at the utility provider's premises.
What's NOT Covered by Business Interruption Insurance
- Pandemic and infectious disease closures — most NZ policies now exclude losses from pandemics, epidemics, or government-mandated closures related to infectious diseases following COVID-19
- Loss without physical damage — if your business loses revenue due to a market downturn, loss of a key client, or reputational damage, this is not covered. An insured physical damage event must trigger the claim
- Losses during the waiting period — most policies have a waiting period (commonly 48 hours to 14 days) before cover begins. Losses during this initial period are not covered
- Cyber attacks — business losses resulting from cyber incidents, ransomware, or data breaches typically require separate cyber insurance
- Wear and tear or gradual deterioration — damage resulting from poor maintenance, gradual decay, or lack of upkeep is excluded
- Losses beyond the indemnity period — once your chosen indemnity period expires (e.g., 12 months), the policy stops paying regardless of whether your business has fully recovered
How Much Does Business Interruption Insurance Cost in NZ?
Business interruption premiums are typically calculated as a percentage of your declared gross profit, combined with your industry risk profile and indemnity period. Below are indicative monthly premium ranges. Actual premiums vary — your insurer will assess your specific circumstances.
| Business Type | Annual Revenue | Indicative Monthly Cost |
|---|---|---|
| Sole trader / home-based | Under $200K | $30 - $60/month |
| Retail shop | $200K - $500K | $40 - $90/month |
| Cafe or restaurant | $300K - $800K | $50 - $120/month |
| Trade business (builder, plumber) | $200K - $1M | $40 - $100/month |
| Professional services firm | $500K - $2M | $50 - $130/month |
| Manufacturing / warehouse | $1M - $5M | $80 - $250/month |
Factors That Affect Your Premium
- - Declared gross profit: The higher your insured gross profit, the higher the premium — because the insurer's maximum payout is larger
- - Indemnity period: A 24-month indemnity period costs more than a 12-month period, but provides much more protection for businesses that take longer to recover
- - Industry risk: Hospitality and manufacturing businesses face higher premiums than office-based businesses due to greater fire and equipment risks
- - Location: Businesses in high-risk natural hazard zones (earthquake-prone Wellington, flood-prone areas) may face higher premiums
- - Waiting period: Choosing a longer waiting period (e.g., 14 days vs 48 hours) reduces your premium but means you absorb more of the initial loss
- - Building and fire protection: Sprinkler systems, fire alarms, and modern building construction can reduce premiums
Who Needs Business Interruption Insurance?
Any business that would lose revenue if its premises, equipment, or stock were damaged should consider business interruption insurance. If you could not continue trading — or would trade at significantly reduced capacity — while your property is repaired or rebuilt, you need this cover.
Business interruption insurance is particularly important for businesses that:
Is Business Interruption Insurance Legally Required in NZ?
Business interruption insurance is not legally required in New Zealand. No statute mandates that businesses carry this type of cover.
However, it is often effectively required in the following situations:
Bank and lender requirements
If you have a business loan or mortgage over commercial property, your bank or lender may require business interruption insurance as a condition of the loan. This ensures you can continue servicing the debt even if operations are disrupted.
Commercial lease obligations
Some commercial leases require tenants to maintain business interruption cover, particularly where the landlord wants assurance that rent will continue to be paid during a disruption period.
Franchise agreements
Many franchise agreements mandate that franchisees maintain business interruption insurance to protect both the franchisee's and franchisor's revenue streams.
Investor or shareholder agreements
Businesses with external investors may be contractually required to maintain adequate business interruption cover to protect the investors' interests.
Business Interruption vs Loss of Profits — What's the Difference?
These terms are often used interchangeably, but there is a distinction in how some insurers define them:
- - Business interruption typically refers to the broader policy that covers loss of gross profit plus additional increased costs of working
- - Loss of profits may refer specifically to the net profit component of the loss
- - In practice, most NZ policies use "business interruption" as the umbrella term covering all income-related losses
The key point is that your policy should cover your gross profit (revenue minus variable costs), not just your net profit. Your fixed costs continue during an interruption, and your policy needs to cover them.
Indemnity Periods and Waiting Periods Explained
Two of the most important decisions when setting up your business interruption policy are the indemnity period and the waiting period. Getting these wrong can leave you seriously underinsured.
Indemnity Period
The indemnity period is the maximum time your insurer will pay your claim. Common options are 12, 18, or 24 months. Consider how long it would realistically take to:
- - Obtain building consents and resource consents from your local council
- - Complete repairs or rebuild your premises
- - Replace specialist equipment (which may have long lead times)
- - Rebuild your customer base to pre-loss revenue levels
After the Canterbury earthquakes, many businesses discovered that a 12-month indemnity period was insufficient. Rebuild times stretched well beyond 12 months due to consent delays, contractor shortages, and infrastructure damage. A longer indemnity period costs more but provides critical protection.
Waiting Period (Time Excess)
The waiting period is the initial period after the loss during which no payout is made. It works like a time-based excess. Common waiting periods are:
- - 48 hours: Standard for most small businesses — you absorb two days of lost income
- - 7 days: Lower premium, suitable for businesses that can absorb a week of disruption
- - 14 days: Lowest premium option, but you carry more of the initial loss yourself
NZ Natural Disaster Context
New Zealand's natural hazard exposure makes business interruption insurance particularly important:
- - Canterbury earthquakes (2010-2011): Thousands of businesses in the Christchurch CBD were shut out of their premises for months or years. Many that lacked adequate business interruption cover — particularly those with short indemnity periods — never reopened
- - Cyclone Gabrielle (2023): Severe flooding across Hawke's Bay, Gisborne, and other North Island regions caused prolonged closures for farms, orchards, vineyards, and town-centre businesses
- - Wellington seismic risk: Wellington businesses face ongoing earthquake risk. Building assessments, cordons, and strengthening requirements after an earthquake can prevent access for extended periods even if your building survives intact
How Business Interruption Claims Are Calculated
Business interruption claims can be complex. Understanding how insurers calculate your payout helps ensure you are adequately covered and that your claim is settled fairly.
Step 1: Establish the Standard Revenue
Your insurer will determine what your business would have earned during the indemnity period had the loss not occurred. This is based on your historical financial records — typically the previous 12 months of trading, adjusted for any trends (growth or decline) and seasonal variations.
Step 2: Calculate the Shortfall
The insurer compares your standard (expected) revenue against your actual revenue during the interruption period. The difference is the revenue shortfall. If your business earned nothing during the closure, the shortfall equals your entire standard revenue.
Step 3: Apply the Rate of Gross Profit
Your insurer applies the rate of gross profit (gross profit as a percentage of revenue) to the revenue shortfall. This removes the variable costs that would have stopped anyway — you are only compensated for the fixed costs and profit margin you lost, not for stock you did not need to buy.
Step 4: Add Increased Costs of Working
Any additional expenses you incurred to reduce the loss are added — such as temporary premises rent, equipment hire, overtime wages, or express freight costs. These must be reasonable and proportionate to the loss they prevented.
Step 5: Deduct the Waiting Period and Excess
Losses that fall within your waiting period (time excess) are deducted, as are any monetary excesses. Some policies apply the waiting period as a true time excess (first X days excluded), while others apply it as a qualifying period (no cover unless the interruption exceeds X days, then full cover from day one).
Avoiding Underinsurance
Underinsurance is common with business interruption policies. To avoid it:
- - Review your declared gross profit annually — if your revenue has grown, your declared amount may be too low
- - Choose an indemnity period that realistically reflects rebuild and recovery times, not the shortest (cheapest) option
- - Include all fixed costs in your gross profit calculation — rent, wages, loan repayments, insurance, rates, and other ongoing expenses
- - Ask your accountant to help prepare an insurance-specific gross profit calculation — it differs from your standard accounting gross profit
Related Insurance Types
Business interruption insurance works alongside other commercial policies. Here is how it fits with the broader insurance picture for your business:
| Insurance Type | What It Covers | Relationship to BI |
|---|---|---|
| Material damage / property | Repair/replacement of buildings, contents, stock | Required as the base policy for BI cover |
| Public liability | Third-party injury and property damage | Separate cover — BI does not cover liability claims |
| Cyber insurance | Cyber attacks, data breaches, ransomware | Covers cyber-related income loss (excluded from standard BI) |
| Combined business policy | Bundles material damage, BI, liability, and more | Often the most cost-effective way to add BI cover |
Frequently Asked Questions
What is business interruption insurance?
Business interruption insurance (also called loss of income insurance) covers the revenue your business loses and the ongoing expenses it must pay when operations are disrupted by an insured event such as fire, flood, earthquake, or storm damage. It pays out during the period your business cannot trade normally.
How much does business interruption insurance cost in NZ?
Business interruption insurance in New Zealand typically costs between $30 and $150 per month for small businesses, depending on your annual revenue, industry, indemnity period, and the insured events covered. Premiums are usually calculated as a percentage of your declared gross profit.
Does business interruption insurance cover pandemics or COVID-19?
Most business interruption policies in New Zealand now exclude pandemics and government-mandated closures following the COVID-19 experience. Some policies introduced specific infectious disease exclusions from 2020 onwards. Check your policy wording carefully, as coverage varies between insurers.
What is an indemnity period in business interruption insurance?
The indemnity period is the maximum length of time your insurer will pay out for lost income after an insured event. Common indemnity periods in NZ are 12, 18, or 24 months. You should choose an indemnity period long enough to cover the time it would realistically take to rebuild, refit, and return to normal trading levels.
Do I need material damage insurance to get business interruption cover?
Yes. Business interruption insurance is almost always sold as an extension to a material damage (property) policy. The interruption must be caused by physical damage to your insured property or, in some cases, damage to a supplier or customer's property. You generally cannot buy standalone business interruption cover without an underlying material damage policy.
How is gross profit calculated for a business interruption claim?
For insurance purposes, gross profit is calculated differently from accounting gross profit. It is typically your revenue minus your variable costs (costs that stop when you stop trading, such as stock purchases and freight). Fixed costs like rent, salaries, and loan repayments are included in the insured gross profit because they continue even when revenue stops.
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