If your property suffers damage and you have to file a business income claim, will your insurance cover your payroll? The answer might surprise you.
When it comes to loss of rents or business income claims, ordinary payroll might fall into a coverage gap. And if your policy doesn’t clearly account for it, you could be left holding the bag for employee wages during the downtime. Here’s how it works—and where it can go wrong.
“Ordinary payroll” refers to wages paid to employees who aren’t classified as executives or managers—think administrative staff, cleaning teams, social directors, maintenance, or front-line customer service workers. In a standard Business Owner’s Policy (BOP), coverage for ordinary payroll typically only lasts 60 days after a loss. After that, you’re on your own, unless you’ve purchased additional coverage or specified key employees in your policy. This can be a significant problem if you’re trying to maintain staff during a lengthy rebuild or renovation.
One of the biggest pitfalls we’ve seen stems from “rental value only” coverage. This usually involves large landlords insured under non-standard commercial property forms. These forms are often used by major carriers who underwrite large real estate portfolios. Many of these policies are “manuscript” forms (non-ISO), and while they may appear comprehensive, they often exclude ordinary payroll by default.
Let’s say you’re a landlord with a 300-unit building and only one unit is damaged by fire. You submit a loss of rents claim, expecting compensation for the time that unit is out of service. Seems simple, right? Wrong. SMW recently handled such a claim. In that case, a major carrier reviewed a landlord’s rental loss submission and reduced the claim amount by deducting payroll and “minor operating expenses.” That raised a red flag for us.
When we dug into the carrier’s analysis, we found they had shaved off 10% of the lost revenue for payroll – even though only one unit out of 300 was impacted. The justification? The policy explicitly stated: “Ordinary payroll is not covered.” Typically, only executives or specifically named employees are eligible for continued wage coverage. In this case, that meant salaries for the social director, cleaning staff, marketing, and office personnel were all considered “discontinued” expenses—even though the rest of the building was fully operational. So we had to push back.
We argued that deducting 10% of payroll when only 0.3% of the property (1 of 312 units) was affected made no operational sense. After all, the payroll for key staff doesn’t shrink just because a single apartment is temporarily vacant. While the policy language left little room to dispute the exclusion itself, we successfully challenged the amount of payroll being deducted. By demonstrating the disproportionate nature of the deduction, we got the carrier and their accountant to adjust the final payout, even if the financial gain was modest.
Sometimes, common sense can overcome unfavorable policy language, especially when the numbers just don’t add up. If you’re a landlord or commercial property owner, especially with large portfolios, here’s what you need to do:
- Review Your Business Income or Rental Value Coverage
Check whether it’s a standard ISO form or a custom (manuscript) policy. Language about payroll varies widely. - Understand What’s Excluded
In many forms, ordinary payroll is always excluded – not just limited. This includes staff you may want to keep during repairs, like leasing agents, janitors, or office support. - Watch for “Rental Value Only” Traps
Policies written for rental income alone may ignore non-rent revenue streams, such as laundry machines or amenity fees—which could total thousands per month. - Be Strategic with Key Employees
If you can’t afford to lose certain staff, list them as key employees or extend your payroll coverage appropriately. - Consult With Experts Before a Loss Happens
Adjusters follow policy language to the letter. Don’t rely on post-loss logic—get your policy reviewed before disaster strikes.
Insurance carriers will often analyze a claim with strict adherence to the policy form. They are especially likely to do this when that form is designed to limit exposure. As a policyholder, your best defense is a proactive, customized approach to coverage. Make sure your policy fits the reality of your operations, not just your balance sheet.
If you’d like help reviewing your current coverage or navigating a claim, our team is ready to assist. Because when disaster strikes, you shouldn’t have to fight for what you thought you already paid for.
