Business Interruption Insurance

Business Interruption for Sole Traders: What You Need to Know

Business interruption (BI) insurance replaces the income your business loses when a covered event — typically property damage — prevents you from operating normally. It's the difference between surviving a disaster and being forced to close permanently.

For sole traders, BI is most relevant when you operate from specific premises or rely on specialised equipment. A home-based consultant may have limited BI exposure, but a sole trader with a workshop, salon, studio, or trade premises faces potentially months of lost income if those premises are damaged.

The Indemnity Period: Getting It Right

The indemnity period is the maximum length of time your policy will pay for lost income. Periods of 6, 12, 18, or 24 months are standard. Getting this right is critical — most sole traders underestimate how long it takes to fully rebuild after a serious loss.

Consider:
- If your premises are destroyed by fire, rebuilding a commercial space in NZ typically takes 12–24 months given council consents, contractors, and supply chain constraints.
- Specialist equipment may have a 3–6 month lead time to replace.
- Re-establishing client relationships and workflow after an extended closure takes additional time.

Choosing a 6-month indemnity period when your actual recovery would take 18 months leaves you uninsured for the last year of your recovery.

Calculating Your Sum Insured

Business interruption is insured on a gross profit basis — the amount by which your revenue exceeds variable costs. Getting this calculation right matters:

Step 1: Calculate your annual revenue
Step 2: Subtract variable costs (costs that stop if you're not trading) — materials, subcontractor costs, variable wages
Step 3: The remainder is your gross profit for BI purposes
Step 4: Multiply by your indemnity period (if 18 months, multiply by 1.5)

Underinsuring the sum is a common and costly error. Some policies apply proportional reduction if you're underinsured — you recover the same proportion of your loss as your insurance bears to your actual gross profit.

NZ-Specific Considerations

New Zealand's natural hazard environment — earthquakes, flooding, storms, and volcanic risk — makes business interruption coverage more relevant than in many countries. EQC covers the physical structure for some events, but BI is not covered by EQC. Your insurer steps in for the income loss.

Post-Canterbury earthquake experience showed that many small businesses, even with property cover, suffered extended income losses that weren't covered. This drove significant improvement in awareness of BI coverage for NZ businesses.

Material Damage Proviso: Most BI policies require that physical damage to property has occurred (and is covered by a property policy) before BI is triggered. A cyber event, pandemic, or supply chain failure without physical damage typically won't trigger BI — which is why cyber interruption and supply chain insurance are separate products.