Insurance for losses caused by business                does the policy include cover for loss arising
interruption has become a major issue for              from:
Canterbury businesses in the wake of the 4
September earthquake.                                      •    damage to utilities

Below we give a brief overview of business
                                                           •    damage to customers' and/or suppliers'
interruption insurance and some of the pitfalls
that policy holders may not have considered.
How does Business Interruption ("BI")
insurance work?
                                                       "Depopulation" is the concept referring to the
                                                       losses that accrue, not from damage to the
BI insurance provides cover in situations where
                                                       insured’s business, but as a result of a general
damage (which is insured) causes an
                                                       downturn in the local economy as a
interruption to a business which, in turn,
                                                       consequence of people staying away from the
negatively affects gross profits. Cover is
                                                       affected area. It is also referred to as "loss of
designed to return a business to its position
                                                       attraction". There have been a number of
"but for" the damage causing the interruption.
                                                       instances of depopulation in various areas
Therefore, whether the business is profitable or
                                                       around Christchurch.
not is irrelevant.
                                                       As an example, The Press recently reported that
Although the above summary seems
                                                       the very popular Pedro's Restaurant, although
straightforward, there are a number of factors
                                                       undamaged by the earthquake, had suffered a
that will influence how the insurer calculates the
                                                       40% reduction in patronage.
insured's loss. We canvas some of the issues
most relevant to Cantabrians below.
                                                       The problem facing business owners is that BI
                                                       policies, which generally respond to losses
Material damage
                                                       arising from damage to property, are unlikely to
                                                       cater for losses that arise from depopulation.
All cover for BI will be intrinsically linked to the
"material damage" provisions contained in the
                                                       This issue will affect the way a loss is to be
insurance policy. These provisions will identify
                                                       calculated. The insurer, when determining what
what is the insured property (which may extend
                                                       the interruption losses are, will look at what the
beyond the property occupied by the insured)
                                                       business' gross profits would have been if there
and list the types of damage where cover is
                                                       had been no damage. However, in making this
provided or excluded. Therefore, losses will only
                                                       assessment, the insurer will take into account
be covered if the damage occurs at the insured
                                                       the fact that there was a general downturn in
property and the type of damage, causing the
                                                       the area and that the business' gross profits
interruption, is not excluded.
                                                       would have suffered as a result. This means
                                                       that the final BI compensation will inevitably be
With the above in mind, it is important that           lower.
business owners review the material damage
provisions in the insurance policy so as to            Many policy holders may have assumed that all
determine what damage will and will not be             losses caused by the earthquake will be
covered in situations where that damage causes         covered. However, the illustration above shows
an interruption to the business. For example           that this will not always be the case.

Anthony Harper Lawyers

Christchurch Office                                      Auckland Office
Level 9, HSBC Tower                                      Level 15, Gen-i Tower
62 Worcester Boulevard, Christchurch 8140                66 Wyndham Street, Auckland 1140
Telephone +64 3 379 0920 Facsimile +64 3 366 9277        Telephone +64 9 920 6400 Facsimile +64 9 920 9599
Loss of rent                                         Conclusion

Loss of rent, although often dealt with              The issues addressed above are just some of
separately in insurance policies, is one head of     the issues that may affect BI insurance claims
loss caused by interruption that will affect many    and highlight the complexity of this form of
building owners.                                     cover. Business owners will need to be aware
                                                     that BI cover will not necessarily compensate
The majority of commercial policies define cover     them for all losses that have arisen as a result
as being for the reduction in rent suffered, plus    of the earthquake.
any additional expenses incurred to minimise
that loss, less any savings in business expenses     Knowledge of the fine print and an awareness of
paid out of rent. This raises the issue of what      the potential pitfalls will be essential when
type of expenses might give rise to "savings"        making a claim. Anecdotal evidence is that
and what can be considered a "reduction in           insurers are dealing swiftly and pragmatically
rent". In terms of savings, obvious items            with claims, but that issues have arisen over
include outgoings such as waste removal,             the valuation of BI claims. Should problems
cleaning and electricity (for common areas).         arise during the claim process, please do not
However, with the total loss of a building, other    hesitate to contact our Dispute Resolution
items must be considered. For example,               Team.
savings may arise in regard to insurance
payments, rates, repairs and maintenance.            Your Anthony Harper experts

Evaluating the reduction of rent may also not be
so simple. The purpose of a loss of rent
                                                      Peter Woods
provision is to pay for the income lost as a
result of the insured being deprived of the asset
                                                      Direct dial: +64 3 364 3816
(the building). Therefore, any pay-out for
material damage to the premises may be taken
into account. For example, where the policy
holder takes the insurance proceeds and pays
off a mortgage over the affected property, the
saving in mortgage interest is likely to be           Rod Smith
deducted from the claim. Conversely, the rent         Partner
from alternative premises, bought with a pay-         Direct dial: +64 9 920 6460
out, may not be able to be deducted from the          Email:

Although loss of rent may be a simple
                                                      Richard Smedley
calculation with short term business
                                                      Senior Associate
interruptions, there is a potential (especially
                                                      Direct dial: +64 3 364 3825
given this event) for the claims to be much
more complex. Policy holders will need to be
aware of this fact and the possibility of their
claim for loss of rent being reduced for a variety
of reasons.

For an explanation of the leasing issues arising      Disclaimer: This newsletter is for general
from damage and destruction to commercial             information purposes only and is not intended to
properties, please see our Commercial Property        be a substitute for legal advice. While care has
Special Bulletin issued in September 2010.            been taken in the preparation of this newsletter,
                                                      no liability is accepted for any errors.

Anthony Harper Lawyers

Christchurch Office                                    Auckland Office
Level 9, HSBC Tower                                    Level 15, Gen-i Tower
62 Worcester Boulevard, Christchurch 8140              66 Wyndham Street, Auckland 1140
Telephone +64 3 379 0920 Facsimile +64 3 366 9277      Telephone +64 9 920 6400 Facsimile +64 9 920 9599

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