Payroll Clause
The payroll clause governs the extent and period for which wage and salary costs are reimbursed as a continuing expense under a business interruption policy following an insured damage event.
- Clause type
- Definition
- Origin/Market
- International programme
- Favours
- Insurer
- Negotiability
- Negotiable
Purpose
Wages and salaries are typically a fixed cost item included in the business interruption sum insured, since businesses usually cannot, or do not want to, dismiss staff immediately after a loss. The payroll clause defines how these personnel costs are treated during the indemnity period and offers several models: full inclusion of all wages within the gross profit cover, a time-limited reduction for non-key staff (“ordinary payroll limitation”), or a tiered approach following the “dual wages” model.
Effect and limits
Under the dual wages model, an initial period (often a few weeks) with full wage reimbursement is distinguished from a remainder period, in which only a reduced percentage of wages (e.g. 40 per cent) is reimbursed for the staff needed to keep the core business running. The aim is a premium saving compared with full payroll cover, on the assumption that part of the workforce will be laid off during a longer interruption. In practice, however, this model regularly fails to fully cover actual personnel costs in extended loss scenarios, since key staff often need to be retained for longer than originally calculated.
Negotiation and practice
The choice between full payroll cover and the dual wages model should be based on the actual workforce structure and the employment-termination rules of the relevant jurisdiction, not on premium savings alone. Where the dual wages model is chosen, loss calculation is considerably more complex than under full payroll cover, so an adequate sub-limit for claims preparation costs is advisable.