Ordinary Payroll: An Often Center-Stage Issue in Business Income Coverage

Posted by Meaden & Moore on Jun 13, 2016 8:00:00 AM

Labor and the associated labor burden are often significant expenses for a business. A business may choose to insure all labor, or it may choose to exclude or limit coverage for ordinary payroll. When measuring a business income loss, limited or excluded ordinary payroll often takes center stage.

A working definition of business income is, “net profit or loss before income taxes and continuing normal operating expenses incurred, including payroll.” However, coverage for payroll can be excluded or limited (30, 60, 90 days, for example) through endorsement (CP 15 10).

The decision ultimately rests with the business owner as to how or whether payroll is insured or not insured. Ideally, the decision is made with a complete understanding of the insurance coverage, ability of the disaster recovery plan to limit the recovery period, premium labor cost, and what is at risk. That decision is often not black and white, with many variables potentially in play after a covered event.

Below are some examples of issues and questions that arise regularly.

Definition of Ordinary Payroll: The very definition of what constitutes an ordinary payroll classification can be debated. While the definition varies, ordinary payroll is broadly defined as payroll expenses for all employees except key employees (officers, executives, department managers, employees under contract, and employees specifically named). Though organizations may consider every employee as important and vital to an entity’s success, not every employee is “key” in the spirit of the endorsement. Key employees don’t always have specific titles. An insured may demonstrate certain ordinary employees have intrinsic value to the company. Employees may have impressive job titles despite having ordinary payroll job functions.

Complete Suspension v. Partial Operations: Policies tend to have language that assumes a covered event results in a complete suspension of operations at the loss location. How is the policy language applied when operations are only partially suspended and there is an ordinary payroll limitation or exclusion? A partial suspension may have continuing payroll beyond the period that affords coverage that is contributing to the continuing revenue. The continuing payroll may not be efficiently contributing to the continuing revenue and may include idle time.

Payroll as EE or ETRL: An Insured might pursue continuing ordinary payroll beyond the 30, 60, 90 days of limited coverage as extra expense or expense to reduce loss coverages.

Lay Offs, Vacation, and Severance: Ordinary payroll employees might be laid off and paid accrued vacation during the loss period. Is a pre-loss liability of vacation pay covered as a continuing expense when paid during a period of restoration? What if severance packages are offered to the laid off employees?

Identify Labor Burden: Labor burdens for ordinary labor gross wages may not be easily identified and some may already be sunk costs.

Post-Loss Expenses: What if the insured pursued compensation as a result of laying off employees (increased unemployment insurance, recruiting expenses to reopen, etc.)?

Labor Market: An insured may not have access to the proper labor pool once they are ready to resume operations. This could have a significant impact to extended period of indemnity business income losses. What is the cost-benefit of affording ordinary payroll coverage from DOL to retain employees to reduce this risk?

Labor Related to PD: Ordinary payroll employees may be put to work under property damage. Can this payroll be considered beyond the period that affords coverage, especially when the labor cost is cheaper than the contractor cost?

Coinsurance: How would any of the answers to the above affect how ordinary payroll should be treated in a coinsurance assessment?

The interpretation and application of ordinary payroll coverage in a business income loss measurement requires critical thinking and a proper assessment of all the variables in play. The expertise of over 200 professionals at Meaden & Moore offer unique problem solving and consultation resources.