How to Calculate Ordinary Payroll in Business Income Coverage Claims

What is Ordinary Payroll?

Ordinary payroll is an endorsement, or add-on coverage, available on many business interruption insurance policies. It covers the cost of paying employees after a covered loss.

If your business makes a business interruption claim because it’s unable to do business after a covered loss, then you could receive compensation for ordinary payroll, allowing you to continue paying employees for a certain period.

Business interruption coverage covers certain losses for your business after a covered event.

If your restaurant burns down in a fire, for example, then business interruption coverage could cover the cost of renting a backup kitchen. Or, it could cover the money you would have earned if your business was open, allowing you to continue paying staff, rent, and other expenses.

Ordinary Payroll vs. Key Payroll

Ordinary payroll is often a contentious issue in business interruption claims.

Ordinary payroll covers the cost of paying all employees after a loss, while key payroll covers the cost of paying employees critical for business operations.

You and your insurer may disagree over which employees are “necessary” for operations, leading to an insurance claim dispute.

Here’s how ordinary payroll and key payroll disputes work:

• For business interruption claims, businesses split their payroll into two categories: ordinary payroll and key payroll.
• Key payroll covers the wages and benefits of employees crucial for the operation of a business after a covered event. If the business needs to continue paying these employees after a covered event, and if the business would not normally fire these employees after a covered event, then they could be considered key payroll.
• The insurer considers key payroll a fixed cost of doing business. These employees need to continue to be paid for the business to be operational. Insurers would cover key payroll after a loss – say, if the business is destroyed by a tornado.
• Ordinary payroll, on the other hand, includes wages and benefits for all employees of the business – including critical employees and employees who are unable to perform their ordinary job functions after a covered loss. If your hot dog stand burns down, for example, then you may not need a hot dog chef for the foreseeable future.

What Does Business Interruption Insurance Cover?

To understand key payroll coverage versus ordinary payroll coverage, it helps to understand how business interruption coverage works in the first place.

Business interruption coverage, also known as business income insurance, helps replace revenue generated by your business if it cannot operate after a covered loss.

Specifically, business interruption insurance can cover all of the following after a covered loss:

• Revenue you would normally earn if your business was able to operate
• Mortgage, rent, and lease payments for your business’s property
• Certain loan payments and taxes
• Payroll for employees
• Relocation costs, training costs for new employees, and other expenses associated with operating from a new, temporary location

If a tornado destroys your coffee shop, for example, then you can’t sell coffee for the foreseeable future. Business interruption coverage covers your lost income – the income you would have earned from selling coffee – until contractors rebuild your coffee shop.
Business interruption coverage covers things like natural disasters, weather events, and other unexpected events. It can also cover government shutdowns, local risk in your area (like a road closure), and sometimes other events.

A standard business owner’s policy, or BOP, includes business interruption coverage.

Businesses May Choose Ordinary vs. Key Payroll Coverage

As a business owner selecting an insurance policy, you can choose your level of payroll coverage.

Typically, businesses choose 30, 60, or 90 days of ordinary payroll coverage, for example. This coverage allows the business to continue paying all employees for a fixed number of days after a loss.

Some businesses, however, choose to exclude ordinary payroll coverage from their policy to save money. Excluding this coverage could help you save money on premiums. Other businesses choose to only cover key payroll.

Businesses could also choose to control wages by laying off employees after a covered loss. A business could choose to carry 60 days of ordinary payroll coverage, for example. If the business continues to be closed after 60 days, the business can lay off employees to avoid paying out of pocket.

Generally, businesses purchase enough payroll coverage to cover a short-term interruption in the business – say, a shutdown of 30 to 90 days. However, the business owner can select their level of coverage based on their desired risk.

How to Decide Key Payroll vs. Ordinary Payroll

The difference between key payroll and ordinary payroll could have an enormous impact on your insurance claim.

As a business owner, you may need to decide which employees are key payroll and which are ordinary payroll.

Some of the things to consider include:

Skills, Training, & Experience: Is the employee highly skilled or trained? Would that employee be difficult to replace? They could be considered key payroll.

Workforce Availability: Is it easy to hire workers in your area? If so, you may be okay setting a large number of employees as ordinary payroll as it’s easy to re-hire employees once your business is operational.

Position, Salary, Responsibility, & Influence: Generally, “key payroll” employees have a higher salary and position than other employees. They have more responsibility and influence – say, because of their advanced skillset and experience.

Union & Legal Requirements: You may be forced to continue paying employees for a certain period of time because of union or labor law requirements. Some states, countries, regions, and unions, for example, require you to continue paying employees for a certain number of days after a layoff (say, one week for every year of employment). Companies should consider these requirements when setting key payroll and ordinary payroll coverage.

Complete Suspension vs. Partial Suspension: Most business interruption claims cover incidents where the business needs to completely suspend normal activities. There are some cases, however, where the business only needs a partial suspension. Check the language of your business interruption policy to see if there’s a difference, as it could change how your business approaches a covered loss.

How to Handle Business Interruption Insurance Claim Disputes

Business interruption claims can be contentious – and ordinary vs. key payroll disputes can be particularly contentious.

Consider talking to a public adjuster for help with your dispute. A public adjuster can evaluate your business interruption claim with your business’s best interests in mind. A public adjuster works for you – not your insurance company.

Contact ClaimsMate for a no-cost consultation with a public adjuster specializing in business interruption coverage.

Stephanie Corona

Stephanie is a property insurance claim expert with over 20 years of experience working as an insurance adjuster, expert witness, appraiser and umpire. She is passionate about sharing her expertise, knowledge, tips and training to help both property owners and Public Adjusters in their pursuit of effectively managing claims and recovering the claim settlement they deserve after a loss.