“Our client suffered a fire loss. For loss of business income, the claims adjuster told the client they would be reimbursed for any salaried employees but not hourly because that was not an ongoing expense since those employees were not working. I understand the rationale that is being used, but I thought we were always trained to include payroll in business income so the client could retain their workers and not risk them gaining employment elsewhere, or having them file for unemployment for a lower compensation and causing the client's unemployment rate to go up. Also, I thought payroll needed to be factored in to avoid a coinsurance penalty, or using the CP 15 10 to subtract specific payroll out to be able to purchase lower coverage.”
This situation is another variation about whether a continuing expense is "necessary," as required by the ISO CP 00 30. Our consensus continues to be that the INSURED, not the adjuster, is in the best position to determine what expenses are necessary for his or her business continuity. As long as the limit is adequate, the insured has paid a premium for this coverage. Here are some VU faculty responses to this specific question:
If there is no payroll limitation on the policy and the insured elects to continue paying his hourly workers to preserve them as employees (or for any other reason), the continuing expense of the hourly workers is owed under the ISO CP 00 30 business income form.
Is the hourly payroll "necessary" for the insured? If you can show the necessity, it should be included. Yes, we would normally include payroll because you are including every expense that may be necessary for the insured. Conservatively estimating the limit needed may end up with including an expense that does not continue but usually that extra limit is needed for payment of something on the claim.
The ISO CP 00 30 includes the following under “Loss Determination”:
The amount of Business Income loss will be determined based on...The operating expenses, including payroll expenses, necessary to resume “operations” with the same quality of service that existed just before the direct physical loss....
There’s no automatic exclusion of any payroll, but payroll will only be included in the loss calculation if it was "necessary" to allow the business to resume its previous level of service. The loss of specialized and difficult-to-replace workers would seem to qualify for payment. Workers who can easily be replaced probably would not qualify for inclusion in the loss calculation. The question is further complicated if your policy includes some sort of ordinary payroll limitation, but you didn’t specify that. As for the coinsurance issues, there are dozens of excellent articles on business income, the calculation of coinsurance, and completion of the worksheet for business income insurance on the VU. You need to refer to them to answer your questions about how much coverage to recommend and how to deal with coinsurance.
Typically, business income insurance covers the estimated net income a company would have earned had there been no loss. It also covers any continuing normal operating expenses—including payroll—considered necessary for a business to resume operations with the same quality it produced prior to the loss.
Payroll expenses are usually a business’s largest single expense, and whether or not all payroll expenses are "normal" or "necessary" may be a subject of disagreement. If the adjuster believes certain personnel positions could be easily filled when the property is restored and the business is ready to resume, then payroll expenses related to these positions most likely will not be covered. To make a determination, the adjuster usually considers the local labor supply, the labor competition, and the position’s skill level. The insured, likewise, ought to consider those factors when estimating the maximum loss he or she expects to incur during an unexpected shutdown in business.
A client may or may not include all payroll expenses when determining a loss, but all payroll expenses must be included when figuring the amount of insurance a client must buy to satisfy the coinsurance clause. In some cases, that forces clients to buy more insurance than they need. In other cases, clients may pay a higher premium for a lower coinsurance percentage (the lower the percentage, the higher the rate).
Two endorsements are available to avoid problems regarding payroll.
The Payroll Limitation or Exclusion endorsement (CP 15 10) can counter one or the other of these instances. It should be used only when the amount of payroll expense is significant in relation to gross income and only after considering the endorsement’s effect on the premium. (Note: An additional rating factor of 1.12 applies when using the endorsement.)
This endorsement eliminates doubt as to which payroll expenses are necessary to continue during a business shutdown. It allows all payroll or payroll of specified employees to be excluded from the business income coverage and from the coinsurance calculation. If the insured decides to exclude only specified employees, coverage for "important" employees such as officers, executives, department managers, and employees under contract continues as long as the payroll for those employees is "normal" and "necessary." (Additional exemptions by job classification or specific employees may be specified on the form.) The endorsement also allows an option to cover payroll expenses of specified employees so that coverage applies for either the first 90 or 180 days of the shutdown.
The Discretionary Payroll Expense endorsement (CP 15 04) may provide a more flexible alternative to the Ordinary Payroll Limitation or Exclusion endorsement. It provides coverage for payroll expense for selected job classifications and/or employees designated in the endorsement, regardless of whether such expenses are necessary to resume operations, The endorsement can be tailored to provide such coverage for a maximum number of days specified in the endorsement. The payroll covered by this endorsement should be included in the determination of the appropriate business income loss limit. The Commercial Lines Manual does not prescribe the rating procedures for this endorsement. Each company files its own rating procedure if it makes the endorsement available.
In case of a disagreement concerning payroll when one of these endorsements isn’t attached, the agent and the policyholder need to “push back” and explain the difficulty of hiring new employees after the damaged property is restored and business is ready to resume. Unfortunately, the insurance company is in the driver’s seat unless the policyholder wants to hire a public adjuster or lawyer to push the claim.
Payroll is included in the definition of "business income," however the loss determination provision specifies that coverage will apply to payroll expense IF it is necessary to resume operations. It states that - a. The amount of Business Income loss will be determined based on: (3) The operating expenses, including payroll expenses, necessary to resume “operations” with the same quality of service that existed just before the direct physical loss or damage . . .
All continuing expenses, including payroll, are paid if they are necessary to resume operations. If all payroll could be covered by adding the DISCRETIONARY PAYROLL EXPENSE ENDORSEMENT (CP 15 04).
You are correct. The unendorsed ISO CP 00 30 covers ALL payroll from the hourly worker to the CEO.
In any property loss, the insured has to prove that they had a loss. In reading the question, it appears that salaried employees continued to receive monies, while the hourly did not. The insured can prove the necessary continuing expense for some, but not all employees. If the insurance company pays for hourly workers (who were not paid), then the insured would be over-indemnified. If the insured found work for them, then the insured has a loss.
I think we need to know a couple of additional things:
Were the hourly workers paid on a regular basis for a consistent number of hours, thus enabling reasonable computation of compensation while they are not able to work?
Was a worksheet completed in order to determine the appropriate limit of coverage and, if so, how was compensation of hourly workers treated in that document?
Certainly good hourly workers can be key in getting an organization back in full operation and profitability quickly.
Last Updated: July 6, 2015
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