One of the most contentious issues in any business interruption matter is often the treatment of payroll. While the employees who are deemed to be “Key” to the business are insured under any business interruption policy wording, the treatment of “Ordinary” employee payroll varies wildly from policy to policy.
In dealing with business interruption coverage it is necessary to establish from the day the coverage is purchased what portion of the business’s payroll relates to key versus ordinary employees. This distinction is a requirement of determining both the best coverage type for the business and necessary for the purposes of setting policy limits. But what are key and ordinary payroll?
Ordinary Payroll Coverage
Depending on the policy Ordinary Payroll could be treated in any one of the following ways:
- Insured for the entire indemnity period within the business interruption coverage;
- Not insured under the business interruption or any other coverage;
- Insured under the business interruption coverage for a specified period (typically either 90 or 180 days);
- Insured separately from the business interruption coverage, subject to different limits, co-insurance requirements, and maximum periods of indemnity.
At the time a policy is being sold it is important to consider which of these coverage types will best suit the insured and at claim time it is important to know which of these options is to be considered as each will have its own set of considerations.
Key vs Ordinary Payroll
The payroll records of any business are rarely neatly split between different groups of employees based on role or titles. Most of the time when reviewing payroll records all the employees of a business will be found in a single list of records. So how do we establish who is key and who is ordinary?
We can start by looking at some definitions commonly found in policy wordings. One of the most common definitions of Ordinary Payroll you will find in a business interruption policy is as follows:
Wages and salaries other than salaries to permanent staff and wages to foremen and important employees whose services would not be dispensed with should the business be interfered with or interrupted
Typically this wording is interpreted to mean that the Key employees of the business are those who are in management or supervisory positions or employees with unique skill sets required by the business. However, the term “important employees” is often open for interpretation and an employee’s services may be viewed differently in terms of the value added to the business by different parties.
Key employees would often be the most difficult for the business to replace, and have the greatest impact on the business if they had to be let go or laid off. As such, in the event of a loss requiring the business to cease operations for an extended period of time, the employees the Insured’s management decides to lay-off versus continuing to pay will provide good insight into who the business considers Key.
In the event of a dispute over which employee should be considered Key vs Ordinary following a loss, one option is to review the original worksheet from when the policy was purchased to consider what dollar value was allocated to Key and Ordinary payroll respectively.
Owners of the Insured Business
It is important to note the owners of the business, if on the payroll, are always considered Key, regardless of the actual work they contribute to the business. This is because the wages paid to the owners are entirely at the owner’s discretion and essentially this represents a distribution of the profits of the business.
As payroll is frequently one of the largest expenses incurred by a business, it is important to ensure the allocation of Key and Ordinary payroll is done carefully and consistently with the original intent when the policy was written. As the expense is often large its treatment will have significant impact on the profit rate of a business which will directly impact co-insurance compliance.