What is the “ordinary payroll” provision in your business owner’s policy (BOP), and when does it apply to your claim? In the standard BOP, the provision will cover the cost of paying normal employees in the event of a catastrophic loss. Usually part of the Business Interruption coverage, the ordinary payroll includes every employee except corporate officers, managers, and contracted employees.
Typically, the ordinary payroll coverage lasts for a certain number of days – 60 or 90, for example. This time limit means the insurance carrier might only pay for those 60 or 90 days of ordinary payroll – whether the business is completely shut down or partially operating. It is important for all parties involved in the claims process to understand how the terms of the Ordinary Payroll provision are applied to each event and circumstance.
Let’s look at a business scenario to understand this concept. We have a client that runs an agriculture business, with various business revenue components that include pick-your-own vegetables, a bakery and country store, seasonal activities (pumpkin and apple picking, hayrides), and a venue for wedding receptions. Then one of the farm’s buildings had a fire. The damage only impacted the wedding venue. Despite the setback, the non-wedding business areas were able to reopen (although they did suffer some revenue disruption). So, the farm business as an overall venture was able to continue operating on a partial basis.
The loss period determined was 12 months. The insured had only 60 days of ordinary payroll coverage – and the insurance company only wanted to pay ordinary payroll for those 60 days. Who does that affect? In this scenario, the insured should be compensated for their net profit plus continuing expenses (which would include ordinary payroll). Think about it this way: The insured needed these employees to work and generate revenue. If the insured didn’t have these employees working during the period of partial operations, then the insurance company would have sustained a greater business interruption loss.
After all, most businesses need employees to generate revenue. If the insurance carrier only pays the insured for 60 days, then why should the business even continue to operate? Ordinary payroll is supposed to ensure that the insured can maintain its staff during a total shutdown. Remember, the purpose of ordinary payroll is to provide coverage in the event of a catastrophic loss. In the event of a total shutdown, ordinary payroll allows you to keep paying ordinary employees so you don’t lose them. Ordinary payroll is supposed to protect your payroll during an idle period.
But look out, because we see carriers thinking ordinary payroll coverage applies and should be limited during partial shutdowns. It really should apply to complete shutdowns. In the case of the farm, the business did not have a full shutdown – only partial. The payroll was used to generate the revenue and this cost is absorbed in the sale of the item.
If you have questions about Ordinary Payroll, Business Interruption or other business coverages, feel free to call SMW to confer.
