A Quick Tip on Dual Wages

Two brokers have recently contacted the Product Manager suggesting there is a fault in LMI BIcalculator (www.BIcalculator.com), as it does not calculate a total Indemnity Period under Dual Wages of less than 52 weeks (12 months).

This is not an error, but simply in line with the rules that were put in place when Dual Wages, as a form of Pay-Roll insurance, was first developed.

The theory behind Dual Wages was designed to overcome some of the disadvantages of all the previous methods of partially insuring Pay-Roll. With Dual Wages, Pay-Roll is insured 100% for the first period, say 12 weeks. Then for the balance of the Indemnity Period, wages are only partially insured, eg. 40% of wages may be covered for 40 weeks.

Dual Wages insurance provides an ‘Option to Consolidate’. In theory, with this cover you get the best of both worlds. The number of brokers that have been sued for incorrect advice on Dual Wages means, that in many countries, many broking houses have issued instructions that Dual Wages are not to be used. I have been calculating Business Interruption claims since the mid 1980’s and I am yet to see a single claim where the Dual Wages cover arranged fully indemnified the Insured.

Notwithstanding this, in my mind, there is still a place for this method of insuring Pay-Roll but the following rules should apply:

• it is not for every risk/Insured and the type of business, the ease of replacing staff and the risk appetite of the Insured are but a few of the considerations;
• the length of the Initial Period should never be just plucked from the air. In my experience 13 weeks should be considered a minimum;
• the total of the Initial Period and the Remainder period should total the Indemnity Period for the insurance of insurable Gross Profit, which should be a minimum of 12 months and ideally longer;
• the percentage of Pay-Roll to be insured for the Remainder Period should never be guessed but rather calculated to cover all the key personnel off the business plus a contingency;
• there ought to be severance cover in place sufficient to meet the costs of the wages in lieu of notice for those staff that will be “let go” in the event of a major disruption, and finally;
• the program needs to be put together by someone experienced in Business Interruption insurance and Dual Wages in particular.

In most companies the owners and management claim that their biggest asset is their staff. If this is true than the insurance of Pay-Roll is one of the most important covers the business will have in place. It has to be right. My advice is that if you or the Insured is in any doubt, insure wages 100%.

Turning back to where I started. Brokers please do not consider Dual Wages coverage with an Indemnity Period of less than 12 months. Underwriters, dust off your Underwriting Guidelines, I will be very surprised if it allows the Dual Wages insurance for a period of less than 12 months.

To learn more about the insurance of Pay-Roll refer to Chapters 9 and 10 of Business Interruption Insurance and Claims – a practical guide. http://www.lmigroup.com/content.aspx?artId=62

While LMI BIcalculator has been designed to walk a user though the calculation, it is better to be safe than sorry. Therefore if you ever want your calculation checked please send it through by email and I will run my eyes over it.

Finally, if you are going to insure on a Dual Wages basis, please remember that the calculation takes up to 3 times longer to do than a standard Business Interruption claim where the Pay-Roll is insured as part of Gross Profit. Therefore, please ensure that you have an adequate Sub-Limit for Claims Preparation Fees.