Small business: Peter Townsend on business insurance

1:30 PM Monday Feb 4, 2013

What have Canterbury's SMEs learned from the 2011 earthquake about insuring their businesses?

The first thing SMEs must realise is that every insurance policy is different, that is the critical thing. Companies need to understand what they are covered for, to understand exactly what their policy actually means. They should go through it in some detail. When talking to conferences in Auckland, I often ask companies: "Do you know what your insurance covers?" And normally only two hands are raised.

The first critical issue in a time of crisis is the loss of profit. Is your business continuity covered? All kinds of scenarios unfold in a disaster. It could be a case where your business is okay but customers can't get to your building because it is in the red zone.

Your insurers might argue your business has not actually been interrupted. It's so important for people to understand the fine print.

Who can help you make sure you have the right insurance policy?

One of the lessons to be learned from Christchurch, and something which has an application for every business in New Zealand, is that there are a lot of good brokers and good insurance companies. My recommendation is to work closely with them to make sure they offer you 100 per cent transparency on your insurance cover. What many Christchurch businesses found was they they were under-insured.

Did companies go under in Christchurch because of the business interruption?

Remarkably, despite it all, the churn rate of companies going under in Christchurch has changed very little. The churn was 11.4 per cent pre-earthquake and post-earthquake has been 11.6 per cent. Around 6000 companies had to vacate the CBD but they found solutions.

Where companies did go wrong was they didn't have their buildings insured properly or they didn't have insurance to cover their stock being damaged or to cover their computer systems going down. Our own city council , the second largest property owner in New Zealand, was under-insured. The most confusing policy, and the one which severely tested the survival of businesses, was the business interruption policy. There was a lot of argument over how much could be paid out.

What exercises do you recommend all NZ SMEs should go through to prepare for an emergency?

My strong recommendation is that insurance is a fundamental part of your business plan. It needs to be factored in.

Every year companies should pretend that they have had a total disaster and have a look at their insurance policy and see if they are protected. Christchurch companies were lucky in that they had help from the Government, banks and the IRD to keep their cash flow going - more than $200 million was loaned to businesses after the February earthquake. This is not going to happen in every disaster.

Wellington business has learned from our experience but doesn't have the money to update its buildings. We are lucky in that 80-90 per cent of the damage in Christchurch has been covered by insurers. Wellington does not have this money from insurance proceeds so is not in a position to do anything about it.

What was something you might not have expected to do in the wake of the disaster?

One of the chief concerns Christchurch had immediately after the earthquake was telling the rest of the world that the city was not completely destroyed which was the perception. We had to make it known that was still open for business. NZTrade & Enterprise spent $4 million on getting its contacts overseas to reassure customers there, face to face, that we were still operating on a business as usual basis.