Diana Clement: Moral of the quake - Prepare for everything

Being prepared for an emergency should extend to your finances. Picture / Rotorua Daily Post

Financial preparedness has been highlighted by the Christchurch earthquake.

What would you do financially if your employer's premises (or your own if you're self-employed) were destroyed? There is only so long that many businesses can keep paying staff when they've stopped trading.

"Sometimes it takes a catastrophe to remind us how important it is to be prepared," says Geordie Hooft, partner at Grant Thornton New Zealand.

Once upon a time - until September 4, 2010, to be precise - I'd advised anyone who listened to have an emergency fund. Such a fund is a good start and should cover three to six months' living expenses, says Christchurch financial planner Peter Flannery.

Like most people I've reflected over the past fortnight on the impact of the earthquake on people and businesses and realise that financial preparedness is much more than having an emergency stash.

Now I certainly know more about my insurance policies and am about to prepare a financial disaster recovery kit. I'm sure I'm not the only person who doesn't have all their legal documents such as birth certificates, financial documents and critical computer files backed up and ready to go.

None of us expect total loss of our homes in an earthquake and the fine print of insurance policies is brought under the microscope.

Under most policies, such as AA's Home Insurance, if your home becomes uninhabitable it will pay for temporary accommodation for up to 12 months. In the Christchurch scenario, that means a red-stickered home.

On the personal insurances front, many homeowners have income protection insurance.

In most cases, however, this covers only illness and disability. Only redundancy insurance would help if your employer's business fails due to a natural disaster.

If you're employed or self-employed, a major unforeseen disaster could see you lose your income suddenly.

In the case of employees, if your employer's business stops operating they may not have the money to pay you.

Some businesses are literally weeks away from financial disaster at the best of times. What happens if their premises are red-stickered, or if the boss simply drops dead of a heart attack? There goes your income in one fell swoop.

Business interruption insurance would kick in after an earthquake if the business owner has it.

Such insurance policies can cover gross profit, salaries and wages, and book debts, says Paul McCarrison, of McCarrison Hayes Insurance Brokers.

Less than half of New Zealand businesses have this type of cover, McCarrison says. Few in today's economy have enough cash in the bank to keep paying wages and salaries if business income is interrupted.

In most cases to claim on business interruption insurance there needs to be a claim against the business' buildings or contents (plant and machinery) policy as well.

An exception to this would be where the business is unable to operate because utilities were cut off. Key person insurance is something else businesses should consider.

As well as insurance, says Flannery, you need a cohesive risk-management strategy, not just a "hodge-podge, piecemeal" approach that New Zealand businesses lean towards.

And if you are a business owner, dealing with staff can be a sensitive subject, says Hooft.

"Written employment agreements may specify what rights and obligations the business owner has in terms of continuing salaries when the workplace is uninhabitable due to a natural disaster, [but] employers need to consider maintaining the on-going goodwill of staff.

"When something as traumatic as a 7.1 earthquake shakes the ground, some staff may find it difficult to leave home and return to work," says Hooft.

"Although an employment agreement may specify black-and-white provisions, the reality is that a good employer should consider the welfare of staff and work with them to accommodate a reasonable return to work, and the basis for remuneration during any period of closure."

A good insurance policy will provide funding for this.

In this instance the Government is offering a wage subsidy of $350 (gross) per worker per week. This will still leave many staff out of pocket and facing an uncertain future.

If a rented home becomes uninhabitable due to a natural disaster, the Residential Tenancies Act (1986) allows a tenant to quit the tenancy with just two days' notice. Given that the house in uninhabitable, it can't be let.

It's a similar story with commercial properties, many of which are owned by private landlords. The Property Law Act says if leased properties are damaged or destroyed by earthquake, the rent or outgoings will be cut in proportion to the destruction or damage.

Provided private landlords have building insurance, they're probably covered for loss of rent, says Scott Sadgrove of rental property insurance specialist NPS Insurance Consultants.

The loss-of-rent clause hidden in the depths of most building insurance policies kicks in if the house becomes unfit to live in as a direct result of an insured event, such as earthquake.

For example, both AA Insurance and NZI offer loss-of-rent cover as standard for up to $20,000. Interestingly, AA Insurance's loss-of-rent cover lapses after six months and NZI's lasts 12 months. I'd bet not all destroyed houses in Christchurch are going to be repaired or replaced and rentable in 12 months.

One article stuck in my brain last week. It was about a kindly Christchurch shopkeeper who gave water and food to people who didn't have cash. If the power, and consequently eftpos and credit card facilities, go down, you're going to need cash, says Simon Gilroy of Macquarie Private Wealth.

A good point that Gilroy made was that although cheque books are dying (I don't have one), they would be extremely useful if eftpos was down and businesses didn't have an old zip-zap machine for credit cards.

If you're self-employed or a business owner, you may not be able to afford to stop working for long even if there is an earthquake, flood, volcanic eruption or other disaster.

One Christchurch business person I read about last week was lamenting that he didn't have alternative access to the internet other than through fixed phone wires.

It could be a great idea for small businesses reliant on the internet to have a prepaid mobile broadband device such as Vodafone's Vodem or Telecom's T-Stick.

In fact Vodafone was in Christchurch last week giving away Vodems to businesses.

And if you're a business accepting credit cards, should you have a manual credit card-processing machine?

A final word: It's worth reviewing your emergency preparedness from time to time, generally and financially.

As one interviewee for this article found out minutes after the earthquake, his children had been using the emergency torches for spotlighting and drained the batteries.

A financial equivalent could be that your spouse or partner had spent the emergency cash.