Blog Question – Severance Pay
Good day Allan,
Essentially my question is whether Severance Pay is subject to co-insurance. The wording indicates that this “item” is in addition to Clause (a) of Item no. 3, i.e. Payroll, but not that it is a part of that Item. Severance Pay is referred to in the schedule as a Sub-Limit but not within the declared values, where I assume it must be specifically named. The insurer has been unable to provide direction on this.
If not subject to co-insurance, can the client part insure severance liabilities in addition to the dual wages cover? For my client, referred to below, if it is necessary to fully insure there would be no saving achieved over the cost of insuring payroll at 100%. 100% payroll is my preference however the client is resistant to incurring further cost.
Background info. FYI –
The business is a manufacturer and importer of accessories. They are restructuring their business to increase the import activities and are determined to remain in business. The company however has not achieved an insurable gross profit in the last two years, nor is any expected in the near future.
Wages are insured at 26 weeks for administration staff, and on a Dual Wages basis for others with a consolidation period of 13 weeks. Total insured value is $715,000. Full wage roll for the indemnity period is estimated at $1.97M. The business has many long term workers with potential redundancy payments currently of $1.126M
Julie [surname and email provided]
Thanks for your note. While you clearly have read the endorsement I reproduce it for the benefit of readers as follows:
The insurance under this item is limited to such further additional expenditure beyond that recoverable under Clause (a) of Item no. 3 as the Insured is obligated or has agreed to pay under industrial awards, determinations, decisions or agreements for severance pay and/or in lieu of notice to employees whose services are terminated during the Indemnity Period in consequence of the Damage.
As you suggest, this coverage / endorsement should be used to supplement the Dual Pay-Roll item whenever there is an obligation for severance pay on termination of employment.
Severance pay under an Award is usually based on a minimum number of weeks, plus a further entitlement calculated on the employee’s period of service. An employer’s total liability at any one time can be calculated, but that liability can vary substantially from time to time with normal changes of personnel. In your client’s case, the auto industry (from memory) has quite generous provisions for employees and, as there is many long term employees, the cost could be considerable.
Therefore, when a prolonged business interruption occurs (so that the “option to consolidate” under the Dual Pay-Roll item cannot be used) severance pay obligations can exceed the parameters of the selected Dual Pay-roll formula.
The endorsement contains no test for under insurance and like Additional Increase in Cost of Working, Claims Preparation cover or Extra Cost of Reinstatement is a ‘first loss’ cover and is claimable up to the Sub-Limit shown on the schedule.
A think to always keep in mind and discuss with your client is that the Severance Pay Cover is on for wages to be paid in lieu of notice. It does not provide coverage for costs already incurred by the business at the time of the disruption giving rise to the claim. The expenses I am referring to include holiday pay, leave loadings, long service leave entitlements, as well as superannuation and payroll tax payable on these incurred costs.
I agree with your analysis that, at the end of the day, it is often better to insure wages fully for, as in your case, the total amount needed to be insured is the same and with full wages you have the flexibility of continuing to employ staff or let them go, where as with severance pay cover you are making the decision before you know what the disruption is and how long it is likely to last.
In answer to the second part of your question, yes, you can deliberately under insure and not be penalised until the sub-limit is breached.
I hope this answers your questions.