Commercial property business interruption insurance New Zealand covers loss of your rental income in the event the building you or your business owns and lease out is damaged by fire or a natural disaster for example an earthquake. If you own a building and lease it out – think about the situation many commercial landlords had straight after Christchurch earthquakes- some food for thoughts I reckon.
Did you know that before Christchurch earthquakes majority of New Zealand business owners who had business interruption insurance in place back then would have it for 6 months or 12 months indemnity period? (Indemnity period means that this is a specified by the policy period of time monthly payments will be paid by the insurer) 6 months being the most popular period. Now think about if your building is destroyed, you have a mortgage in place as well as you had “other plans for the money” Question to ask what would you do?
Before Christchurch earthquakes many commercial owners in New Zealand had that “she would be right” attitude and straight after everyone who had right insurance policies in place felt that their IQ went up.
Commercial property business interruption insurance usually taken for:
- 6 Months – in my view this is better than nothing
- 12 Months – good enough. At least if you take 6 months to get all the permits plus a year to build a new building- you will only have a few month of being self- insured.
- 18 Months – this option will provide you with piece of mind knowing that if something goes wrong (fire for instance) you are covered.
- 24 Months – this period would provide you with longest period of indemnity and certainly would be enough to cover all your losses.
Commercial property business interruption insurance
It is written on base of a business interruption insurance policy where rental payments you or your business receives serve as business revenue and therefore can be insured.
Now, let me provide you with an example:
You have a commercial building and one day the building you have is a total “write off”. Your claim is submitted and accepted. It is clear to the insurer that due to the nature of the claim your sum insured is going to be paid out to you. (I am deliberately making this example straight forward and easy). You have the building and the land. The claim is going to pay out building sum insured. First hurdle to jump through is actually sum insured itself – typically it is based on a timely submitted commercial valuation you should provide to the insurer every couple of years. What if you had decided to save some money last year and skipped a year – therefore your building sum insured is based on three years ago value of the property.
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I hope this example made you think about inflation for building cost. Builders in New Zealand used to charge way less to compare to what they charge this year.
Next point to think about is council. If your building is (well, was) in Auckland here the link for you to browse through all the forms and permits you would need to apply, receive and complete to get your building consent.
On the top of that think about fees for architectors, lawyers, accountants, all those professionals who would be involved in the process to get to the point where you would be able to start building your new building. All of them would be paid with the money you get from your sum insured and if you have commercial property business interruption insurance that one would pay you rent on behalf of your tenant.
Commercial property business interruption insurance is designed to protect you or your company or your trust “the insured” for losses of business income it sustains as a result of direct loss, damage, or destruction to insured commercial property.
Commercial property business interruption insurance will pay
This insurance pays for the actual loss of business income (in our example it is rental payments you receive) you sustain due to the necessary suspension of your “operations” (read the building is fully or partially destroyed) during the period of “restoration.” The suspension must be caused by the direct physical loss, damage, or destruction to property.
In order to better understand commercial property business interruption insurance let’s explore those three terms highlighted above:
- Actual loss sustained: Business income – in our example it is rental income you or your business receives from your commercial tenants. Commercial property business interruption insurance covers the actual loss sustained by you or your business as a result of direct physical loss or damage to your commercial property by a peril not otherwise excluded from the policy. Please make sure you get familiar with exclusions on your policy.
Typically in New Zealand insurer is only obligated to pay if you or your business actually sustained an interruption of business activity leading to a business income loss and the extent of the insurer’s obligation is limited to the dollar amount of loss actually sustained, but not to exceed the applicable policy limit.
For example you have multiple tenants in your building and only two cannot operate and therefor pay rent due to sustained damages to the building, which means you would only be able to claim a partial amount of your commercial property business interruption insurance amount.
- Business income: In order to get covered you would have to proof to the insurer that you do in fact receive the money you want to insure. It can be done by providing copies of your existing tenancy agreements.
- Period of restoration: Your insurer is liable for the loss of business income only during the period of time you would need for restoration, which is often defined as the length of time required to repair, replace or even to rebuild the damaged or destroyed commercial building. For example your policy specifies 24 months period of commercial property business interruption insurance and you managed to repair the building in 12 months even the policy specifies 24 months you would only receive payments for 12 months due to the fact that your building is fully operational. The period of restoration begins when the physical loss or damage occurs as per my example above that would be the date of the earthquake and it ends when your commercial property should, with reasonable speed, be repaired or replaced.
Your existing commercial property business interruption insurance continues paying even if the policy ends.
For example think about Christchurch again, if you had a policy with only 6 months of cover and the policy was not renewed by the insurer while you were at claim even the policy expired you would receive all 6 months of payments from the insurer. It would be right to think about it like this as long as the physical loss occurs during the policy specified period (keep in mind all general insurance contracts have yearly renewable terms), commercial property business interruption insurance will provide cover for the duration of the period of restoration, even if the policy expired before the period of restoration ends.
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