In reference to Business Interruption, if the client has not declared any severance pay ( at this point) however insures wages, is there flexibility to utilise/ apportion severance pay in reference to Business Interruption?
Geraldo [surname and email provided]
My colleague Carl Greenhalgh from our Brisbane office answered the question in the first instance and I thank him.
The short answer is Yes but!
The cover afforded by Severance Pay can be utilised only for that purpose. As such it is not necessarily an essential cover. There are exceptions to this where there are union or other employment agreements in place that require extraordinary termination payouts and also where redundancy payouts are considerable.
However, Pay-Roll Cover, or Gross Profit Cover (if Payroll is insured at 100%) provides much broader cover that can also be utilised to cover the costs of terminating staff.
Following a loss an Insured is entitled to pay to retain their staff. However, if there is a cost benefit to Insurers to dismiss staff, then there is certainly an opportunity to claim this cost.
An example might be:
- There has been a substantial loss resulting in the closure of the business for 6 months
- The Insured’s Pay-Roll is insured 100% within their GP
- Turnover $100,000 per month
- Rate of Gross Profit is 60% of which Pay-Roll makes up 50% of their expenses
- Gross Profit $60,000/month ($100,000 x 60%)
- Payroll $30,000/month ($60,000 x 50%)
With a 6 month closure Insurer’s liability in regard to the payment of Payroll would be $180,000 ($30,000 x 6)
Say after the first month the Insured decides to terminate their staff
Potential Total Payroll Claim $180,000
Actual Payroll Claim
- Payroll – 1 month $ 30,000
- 2 weeks’ notice $ 15,000
- Redundancies $ 60,000
Savings to Insurer $75,000 ($180,000 potential claim less actual pay-roll claim $105,000).
In this example it can be substantiated that there is a saving to Insurer’s and as such there is no reason why an Insured cannot be submit a claim in this manner.
The only benefit Severance Pay would have in this scenario would be if the Insured had a very long tenured workforce and as such the redundancy payout ended up resulting in no savings. They would then claim the additional amount under the separate Severance Pay cover.
Just to qualify, an Insured cannot claim accrued benefits such as holiday pay, sick pay or long service leave as these expenses have been accrued before the termination of employment.
Now for the but. Severance pay is of use where the Indemnity is short, and or the staff are very long term ones as the severance pay is based on years of service.
The last point I would make is that severance pay only covers the wages in lieu of notice and not the already accrued such as long service leave, holiday pay and where contracted unused sick leave.
I hope this explains the position.