Business interruption (BI) is emerging as the major insurance issue of the Christchurch earthquake.

Some business-owners who cannot operate but whose premises have not suffered physical damage are finding their BI policy does not cover the losses incurred.

Litigation partner Paul Cowey of Christchurch-based firm Parry Field says he sees years of disputes ahead and believes there will be legal precedents set when courts are asked to rule on issues around leases and situations where staff refuse to return to multi-storey buildings.

Mr Cowey says some policies do not respond when the policyholder has not suffered physical damage yet cannot do business.

Examples include:

• The business is in a cordoned-off zone, and would have no customers around even if owners could get access.
• The business is outside the cordon but has no customers to supply because of the disruption to normal activity.
• The premises are fine but at risk from a neighbouring building so the owners cannot get access.

Mr Cowey says he can see businesses trying to quit leases because traumatised employees refuse to return to work in multi-storey buildings.

“If you were on the seventh floor of a building that was undamaged but might be inside the cordon at the moment, you will be expected to go back into the seventh floor,” he says. “But you could find your staff won’t go back in.”

With rental costs rising, he foresee arguments arising with insurers over the cost of new leases and disputes when owners have signed new leases and want to quit the old lease.

Mr Cowey says while no two BI policies are the same, many relate to physical property or only to plant and equipment. He is also seeing exclusions for natural disasters in some policies.

There are more than 4000 cars still parked in the CBD. Car rental costs have rocketed, but many policies only provide a rental car when the owner’s vehicle is damaged, not for loss of access to an undamaged car.

Insurance Brokers Association of New Zealand CEO Gary Young says the quake has highlighted issues around what is covered by BI and how much cover is suitable.

He says policies can contain cover for prevention of access but this is typically limited to five to 10% of the sum insured.

Mr Young says “depopulation” – caused when a business can still function but the customers have left – was an issue after Hurricane Katrina in 2005. There was debate then about whether business loss was a result of the disaster or because no one was buying.

Many Christchurch business-owners are trying to resume work from other premises, but commercial space is scarce. Brian Findlayson, the Southern Regional Manager of the NZ Retailers Association, says landlords want lease terms as long as six years from business-owners seeking to temporarily re-establish outside the CBD.

He says he has not seen issues around BI insurance yet, except for business-owners being underinsured or not insured for interruption. Owners who have used brokers have found the process much easier “because their broker is helping with their claim”.

The association is planning a meeting of business-owners and insurance representatives to discuss insurance issues and is also trying to get some certainty for frustrated retailers as to when they can get into their premises.

Mr Findlayson believes about 10% of retail businesses in the Christchurch CBD will not reopen.