Last month Wellington businesses had a wakeup call – how will they cope if they big one hits? John Shingleton looks at two important issues arising from the Christchurch quakes, which Wellington businesses can learn from.
An English insurance expert says the point of business interruption, or BI, insurance is to ensure a business is “still in the game” after an insured event. It’s there to get businesses through the post-disaster period, and back trading again.
Unfortunately, after the Christchurch earthquakes of 2010-2011, many businesses found they did not have the cover they thought they had paid for.
Most BI policies insure for reduced profit resulting from damage to the business’s property. Some also cover loss resulting from damage to other property. But they nearly all have an “adjustments” or “other circumstances” clause, which refines which types of loss trigger a payout.
These clauses distinguish a fall in profit caused by damage to the insured property (covered) from reductions that would probably have occurred anyway (not covered). And this is where Christchurch businesses came unstuck.
Gross profit fell for many Canterbury businesses after the earthquakes. If that was because the business’s property was damaged, it was mostly covered. If, however, it was caused by fewer customers visiting the area, it was often excluded.
It’s not just “depopulation” that caught businesses out. Insurers questioned the fall in profit if, for example, a key person had left the business shortly before the February 2011 earthquake, or if an orchard had an infected crop at the time.
To claim BI insurance, businesses need evidence to show what caused the fall in profit. Those with several outlets can compare the performance of another store with the damaged outlet. But in other cases proving what caused the fall can be difficult and time-consuming.
Businesses are now taking a second look and thinking seriously about what type of cover they have. Some Christchurch businesses have reduced the gross profit sum insured or dropped it altogether because of the difficulty in proving causation. Instead, they have increased the sum insured for stock and other operating assets.
This has its own issues, but replacing those assets is particularly important for those businesses – it’s what they need to still be in the game.
Attitudes to commercial leases have also changed since the earthquakes – for landlords and tenants. Many are now carefully considering their leases to cover situations they never thought they would have to deal with.
For example, what happens when the tenant cannot access, or fully conduct its business from, the premises because of a life-threatening emergency?
Some leases now state tenants do not have to pay rent and outgoings until they can gain access, or allow either party to terminate the lease if there is still no access after an agreed period.
So it is important that the lease records what will happen after an emergency. Landlords and tenants need insurance to protect themselves from losses – the landlord needs loss of rent insurance and the tenant may need business interruption insurance (after considering the issues raised above).
Before the earthquakes, many leases allowed landlords to charge improvements rent, which covers money spent on work required by law or local authorities.
With more landlords now having to bring buildings up to code, post-earthquake leases do not contain these provisions. Instead, they allow landlords to terminate leases where the cost of compulsory work is unreasonable.
This could cause major disruption, so tenants need to find out during lease negotiations whether any works are likely. They could also try to negotiate a compensation provision if work they have not been told about is needed.
Tenants should look carefully at the landlord’s insurance position and at the premiums and excesses they will have to pay. More landlords now take out insurance to cover loss of rent and outgoings for more than 12 months, which may make it more expensive for tenants.
And finally, after the earthquakes, there were disputes about who should pay for repairs, and who owned fixtures, fittings and chattels. These could have been avoided if, before signing a lease, landlord and tenants made records of the building’s condition and included a list of landlord’s fixtures, fittings and chattels.
Natural disasters disrupt businesses, but being inadequately prepared can magnify that disruption. Wellington business owners would do well to learn from Christchurch’s experience – and make sure they do not face the same difficulties in a similar situation.
John Shingleton is a partner in Christchurch law firm Malley & Co. For more information, see www.malley.co.nz