Following on from our last blog on business interruption, this blog will look at tackling the thorny issue of wage roll in the event of a business interruption claim. Many businesses are unlikely to assume wages would be part of the business interruption calculation – after all, wages don’t form part of the gross profit of a business, and surely you would stop paying wages in the event a claim closed your business, right?
However, while many would consider this an ‘uninsured working expense’ i.e. a cost that would cease in the event of shutdown, wages often fall as part of a business interruption claim and so often end up with a policy being underinsured. Zurich consider 40% of all business interruption policies to be underinsured for this very reason, and could represent a significant additional cost to a business trying to get back up on its feet.
Why might you need to keep paying your wages to staff when you are closed? There are several good reasons:
- Insuring your wage roll ensures your staff still get paid in the event of closure. As such, there is less chance employees may choose to find a job elsewhere, and so avoid the additional cost and headache of recruiting new staff where
- Bringing back your existing and well-trained staff can vastly reduce the time taken to get back to full trading and so limit the cost of any actual claim.
- Making mass redundancies in the event of a closure could harm your reputation significantly and encourage customers to look elsewhere even after you have reopened. Continuing to pay your staff would therefore keep your reputation intact.
The best course of action is to not deduct your wages in the gross profit calculation – this is as a result of conflicting definitions between accounting gross profit and insuring gross profit. There may be other factors you will need to consider however where you may be able to make some deductions:
- How difficult is it to recruit? While there could be some unskilled posts that would be easy to fill again, with a competitive labour market and skills shortages, losing key employees could be catastrophic for recovery if there is no one to replace these. The current issues with the airports are a recent example of the impact of this post Covid.
- Are there any contractual agreements such as redundancy payments that need to be considered? If you would look to lay off staff but have redundancy agreements to meet then it is worth calculating how much this would cost you and insure this.
- Do you have the time to recruit again? Recruiting and training a whole staff at an already stressful time will add to your own costs and the time taken to get back up and running.
- And of course, can your employees work from home, or is it easy to find a new premises to trade from quickly? If you can trade effectively from a new location, an Increased Cost of Working basis may be suitable to cover outlaying costs to relocate.
Overall business interruption cover is a key element of any comprehensive insurance programme, and the costs to include your wage roll are minimal when compared to the time and effort involved in replacing staff. It’s therefore vital you give this consideration when arranging your insurances
Part of any good review will include a conversation around your business interruption sum insured. While this can be complicated, a ProAktive review will include a business interruption calculation to follow to ensure you can get your sums insured as accurate as possible, or these are available online.
By Sam Harby Dip CII – Senior Commercial Account Handler
Source: Omitting wage roll from gross profit sum insured (zurich.co.uk)