Is your business interruption insurance missing a critical risk?

Most New Zealand business owners with business interruption insurance feel reasonably well protected. In the event of a fire at the premises, a flood that shuts the doors, or a supplier crisis that disrupts the supply chain — the policy can kick in, and subject to the policy wording, income is replaced, and fixed costs are met while the business recovers.

It's a sensible safety net. But there's a significant interruption risk that most (BI) policies don't cover — and that most business owners haven't fully accounted for.

What happens when the interruption isn't to a building or supplier? What happens when it's a person?

The gap in most business interruption cover

Business interruption insurance is designed to protect against material damage — property damage, forced closure, supply chain failure. It responds to things you can see and touch: a flooded floor, a fire, a broken piece of equipment.

It doesn't respond to the sudden absence of a person.

Yet for many New Zealand SMEs, losing a single key team member — through serious illness, injury, or death — can be more disruptive than losing the premises. Buildings can be replaced or relocated in weeks. A specialist salesperson, a technical expert, or an owner-operator who holds every key client relationship? That loss can take years to recover from.

Protect your greatest asset: your employees

Consider the types of disruption that business interruption insurance is designed to cover:

• Loss of income due to forced closure
• Ongoing fixed costs — wages, rent, supplier invoices — during a period of disruption
• Recovery costs to return the business to normal operations

Now consider what happens when a key person is absent for three, six, or twelve months:

• Revenue tied to that person drops immediately — often significantly for businesses where one individual drives key client relationships
• Fixed costs don't pause — wages, rent, and obligations continue regardless
• Recovery costs are substantial — recruitment fees, contractor costs, and months of reduced productivity while a replacement comes up to speed

The financial shape of a key person absence looks almost identical to a traditional business interruption event. The cause is just different — and that difference means your (BI) policy won't respond

What helps cover these risks?

Key person insurance is designed to protect businesses against this scenario. Where business interruption insurance responds to physical events, key person insurance responds to human events.

It can work in two ways:

Monthly payments

Provide ongoing income replacement while a key person is absent due to illness or injury — covering revenue shortfalls and the cost of a temporary replacement, up to policy limits. This mirrors the income-replacement function of a (BI) policy, applied to people rather than property.

Lump sum payments

If a key person dies or is permanently unable to return to work, capital is provided to fund recruitment, manage debt, and stabilise the business for the long term.

Together, these mirror the protection that business interruption insurance provides for physical events — applied to the people risk that (BI) cover doesn't touch.

A common scenario for NZ businesses

Example

A Wellington-based engineering consultancy has business interruption insurance in place — arranged when they signed a new office lease. They feel well covered. Their lead engineer who manages three of their five major contracts, holds the key client relationships, and carries fifteen years of technical knowledge — is diagnosed with a serious illness requiring eight months off work. Their (BI) policy doesn't respond because there's no physical damage event. The business faces eight months of revenue disruption, contractor costs, and client management challenges with no financial buffer in place. It's not that they were uninsured. They were just insured for a different risk.

How to think about the two covers together

Business interruption insurance and key person insurance work hand in hand together. Most businesses that take risk management seriously will benefit from having both.

A useful way to think about it: business interruption insurance protects your operations infrastructure. Key person insurance protects your people infrastructure. Between the two, you have a much more complete picture of business continuity.

For New Zealand SMEs in particular — where teams are small, roles are concentrated, and there's limited redundancy built into the organisation — the people risk could sometimes be the greater of the two.

Questions worth asking about your current cover

If you have business interruption insurance in place, it's worth asking:

• Does your cover extend to the absence of a key person, or only to physical and property events?
• If your most critical team member was absent for six months tomorrow, what would that cost the business — in lost revenue, contractor cover, and recovery?
• Is that exposure currently insured?

If the answer to the last question is no — or you're not sure — a conversation with a specialist broker is a sensible next step.

Getting the right protection in place

Marsh Risk has been helping New Zealand businesses manage risk for over 60 years. Our brokers can review your current cover, identify gaps in your business continuity protection, and recommend a combination of solutions — including key person insurance — that reflects your actual risk profile.

LCPA 26/NZ133