Question on the Definition of Payroll
I received this question seeking clarification on the definition of Payroll from an Australian-based insurance broker.
Just a refresher please. Quite often we ask our clients for Turnover, Wages, purchases etc. Wages should include the following:
I doubt that many would include these. Am I correct in including them and if so is there anything else I am missing?
My response was as follows:
Thanks for your note. Like much in insurance, what is to be included is set out (or should be) in the definition of wages or pay-roll. The Australian Industrial Special Risks Policy (“ISR”) uses the term Payroll in an effort, I believe, to avoid confusion with the strict accounting definition of wages.
There is a different definition for Payroll between the Mark IV Advisory ISR and Mark IV Modified ISR wordings while the Mark V ISR versions have yet a different definition. Not all business pack policies allow for wages to be insured separately and where they do, there is no industry wide definition.
It is therefore good practice for the broker to understand the defintion of the policy they are recommending/offering to their client.
Taking the ISR Mark IV Modified as example the following are included to encompass all costs associated with Payroll paid to the “employees of the Insured”.
The list includes:
- Payroll tax
fringe benefits tax
long service leave
workers’ compensation insurance premiums
accident compensation levies
pension fund contributions
While this list specifies long service leave payments, the Mark V wordings do not, but would nonetheless include them as a form of holiday pay.
It does not typically include staff training or staff amenities, which are not paid to the staff themselves, but does include government (taxes) as a result of the employment.
In view of this very wide definition, coupled with the fact that the Insured may well account for these expenses in different sections of their accounts, my advice to those wishing to insure wages 100% is to leave wages (payroll) fully insured as part of Gross Profit. This may be a novel approach for some, for it has traditionally been insured separately. The reason for this was that many years ago, the Premium rate for payroll was lower than for Gross Profit, and there was a benefit by way of Premium saving to insure payroll separately even if Payroll was to be insured 100%.
There is no longer any difference in Premium and so I ask, “Why take the risk of missing part of the expense and finding that wages are not fully insured?”
It is particularly unfair when the “bit” you miss will invariably be left in the insured Gross Profit figure as it will not have been recorded as an Uninsured Working Expense. As such, it will be particularly galling to realise that while the Insured has paid Premium on it, the item will not be included in the claim if the Insured’s entitlement is calculated in strict accordance with the wording.
The way to ensure wages as fully insured is by not recording Payroll as an Uninsured Working Expense and recording against the Payroll item on the Policy Schedule the note “Payroll insured fully under Gross Profit”.
Similarly, if the total Payroll is not significant, I again ask the question, “Why would you risk insuring only part of it?”. The Premium savings will be negligible and the risk commensurate to the saving, huge. The insured business’s staff are their greatest asset, and the reality is that they may be needed more than ever after a loss.
It should not always be assumed that the services of casuals can be dispensed with straightaway. Some casuals already rostered on for the next month might see themselves having a moral right to payment. There have been cases where permanent casuals have had their right to such payment taken up by the Union, and the Insured was not able to resist payment as the downside was significant. More and more companies appreciate the risk of damaging their reputation. Further, in some instances, trained casuals are very important to the organisation and, if out of business for several months, the possibility of them finding other employment and being unavailable for the business recovery is a risk in itself. Each Insured’s situation needs to be looked at on its merits before a loss arises.
The insurance of wages is a very complicated issue that needs to be carefully thought through. In my book, Business Interruption Insurance & Claims: A Practical Guide (go to http://www.lmigroup.com/content.aspx?artId=62, for more information). In this book I devote two comprehensive chapters to the insurance of Wages/Payroll and I would encourage the reader to review these for more detailed analysis. Also, do not forget that www.bicalculator.com is a valuable resource and a great deal of material is provided at no cost under the BI explained section. I developed this site to assist brokers and their clients with a wide range of business interruption coverage issues.
When you or your client use BIcalculator.com all this is explained as you go through the calculation.
Hope this helps and clarifies your question. If you need more after reading the book and/or website, please let me know.