Business interruption (BI) insurance covers the financial losses your business suffers when it can’t operate normally due to a physical event — most commonly a fire, flood, or major property damage. It’s a critical but often misunderstood cover type.
What Is Business Interruption Insurance?
When a covered event (fire, flood, earthquake damage) prevents your business from operating, you face two separate financial hits:
- Lost revenue — you’re not trading, so income stops
- Ongoing fixed costs — rent, salaries, insurance, loan repayments continue even while you’re not trading
Business interruption insurance covers both:
- Gross profit loss — the revenue you would have earned, minus your variable costs
- Fixed operating expenses — rent, salaries, and other costs that continue during the interruption
- Additional expenses — costs incurred specifically to resume trading faster (temporary premises, extra staff, emergency equipment)
What Triggers a Business Interruption Claim?
BI insurance is triggered by physical damage to your insured property from a covered event. It’s not a standalone policy — it always works in conjunction with a business property or commercial premises insurance policy.
Common triggers:
- Fire damaging your premises
- Flood rendering your premises unusable
- Earthquake or natural disaster
- Major equipment breakdown (sometimes covered)
- Supplier or customer premises damage (if you have “contingent business interruption” cover — see below)
Important: BI insurance does NOT typically cover:
- Epidemic or pandemic shutdowns (COVID-19 taught businesses this painful lesson globally)
- Government-mandated closures not related to physical damage
- Cyber incidents (unless you have specific cyber BI cover)
- Loss of contracts or key employees
The Indemnity Period
One of the most important decisions in BI cover is the indemnity period — how long the policy will pay after the triggering event.
Common indemnity periods: 6 months, 12 months, 18 months, 24 months, 36 months.
The indemnity period must reflect how long it would realistically take to fully resume normal trading, not just how long repairs take.
Example: A restaurant’s kitchen is destroyed by fire. Physical repairs: 4 months. Reopen: 4 months. But it takes a further 8 months to rebuild the customer base and return to pre-loss revenue. A 6-month indemnity period would be inadequate — a 12–18 month period would be appropriate.
For businesses with complex supply chains, long lead times on equipment, or established customer relationships that take time to rebuild, longer indemnity periods are essential.
Sum Insured for Business Interruption
The sum insured for BI should represent the gross profit you would have earned over the indemnity period.
Gross profit for BI purposes = Revenue minus variable costs (cost of goods, materials that don’t continue if you’re not trading).
Common mistake: Under-insuring BI. Many businesses set BI sums insured based on historical data that doesn’t account for growth, or they choose a sum that covers revenue but not the full gross profit calculation. Work with your accountant or broker to calculate the correct figure.
Contingent Business Interruption
Standard BI covers your own premises. Contingent business interruption covers you when your ability to trade is disrupted by damage to a key supplier’s or customer’s premises.
Example: Your manufacturing business depends entirely on a single supplier for raw materials. Their factory is destroyed by fire. Your business can’t operate even though your own premises are undamaged.
Contingent BI is valuable for businesses with concentrated supply chains or major single customers. It must be specifically requested and documented.
What Does Business Interruption Insurance Cost?
BI premiums are based on:
- Your gross profit (the sum insured)
- The indemnity period
- Your business type and risk profile
- The quality of your premises and risk management
Indicative annual premiums for a small NZ business ($500,000 gross profit, 12-month indemnity):
- Low-risk business (office-based): $1,000–$2,500/year
- Medium-risk (retail, light manufacturing): $2,000–$5,000/year
- Higher-risk (food processing, chemicals): $4,000–$10,000+/year
BI is typically purchased as part of a commercial package alongside property and public liability.
Is Business Interruption Insurance Right for Your Business?
Most relevant for:
- Businesses operating from a fixed physical premises
- Businesses with high fixed overhead costs (rent, permanent staff)
- Businesses where revenue directly depends on premises access
- Businesses that would face severe financial hardship from 3–12 months without revenue
Less relevant for:
- Fully remote businesses with no fixed premises dependency
- Sole traders without significant fixed overheads
- Businesses where another location could replace the primary premises quickly
Related guides: