To overcome some of the disadvantages of partially insuring Wages, a hybrid form of Wages insurance was developed, called ‘Dual Wages’. In this method, there is an initial period. for example 100% for say 12 weeks. Then for the balance of the Indemnity Period, wages are only partially insured, e.g. 40% of wages may be covered for 40 weeks. This second period is known as the remainder period.
This cover provides an “Option to Consolidate”. This means that rather than take the cover as shaded in Figure 1 below, you can opt to claim 100% wages cover for an pre-agreed number of weeks between the initial period and the full indemnity period. This is shown in the figure below.
Figure 1 – The Option to Consolidate
In Figure 1 above, the shaded area shows the basic option of an initial 12-weeks total cover, as well as 40% cover on wages for the remainder of the 52-week Indemnity Period. The bold outline shows that the two sets of cover can be consolidated to 28 weeks of 100% wages cover.
The cover is more flexible than this figure would suggest as this form of wages insurance allows for savings in wages from the first period, to be carried forward to any time during the second period to better match the insurance coverage to the business’s need for labour following an insured loss. This is again explained in graphical form in Figure 2 below.
The basic option is shown as the 12-weeks total cover and a 40% limit from the 13th to the 52nd weeks. However, the savings made in the first 12 weeks and indeed any savings up to the 44th week in this example, are carried forward for use in weeks 45 to 52, to allow for the resumption of normal trading. These savings in the first 44 weeks, and additional payments in the last 8 weeks, are shown by the diagonally slashed area. It is stressed that in the event of a loss, the decision on which way the claim is presented is at the discretion of the Insured, not the Insurer.
It is indeed flexible, however it does have its limitations, particularly when the cover is sold without any real thought to the actual labour requirements of the business. So often, cover is arranged for 100% for 4 weeks and then 10% or 15% of Payroll for the remainder period. This does not allow anywhere near enough flexibility in most claims.
Firstly, 4 weeks is never enough time to determine future employment needs, and then implement the strategy by retrenchment and stand-downs. Secondly, few businesses could hope to operate with such a small percentage of their labour force. Finally, a low percentage Wages cover for the second or Remainder Period means the Option to Consolidate period is shortened. Therefore, even disruptions for short periods of say 13 weeks (3 months) may not be covered in full.
In practice, this minimalist cover of 100% for 4 weeks and then a small percentage thereafter, is completely inadequate in all but the very shortest of disruptions.
There is a place for Dual Wages insurance, particularly with larger businesses or in organisations where there is a high percentage of unskilled and/or casual labour. However, it does require someone who truly understands the product to determine the level of cover required. Again, it is stressed that no two businesses are the same and any Insurance Broker, Agent or Insurance Representative who always sells Dual Wages with the same length of Initial Period and percentage coverage for the remainder of the Indemnity Period is not doing his or her client, or themselves, any service.
Invariably, the percentage of wages insured is low and, as a result, either the uninsured loss is significant or the Insured is forced to stand-down so many of their staff that it delays the recovery of the business.
In hindsight many businesses find that any benefit in savings in premium is far outweighed by the extra burden placed on the cash flows of the business, and the management stress it causes in the event of a loss.
The calculation of a claim under Dual Wages is a very complex exercise. To learn more about the calculation please refer to Business Insurance and Claims – A Practical Guide, one of the many books from the LMI Group . This book works through an example, comparing the options available and claiming what is most advantageous to the Insured.
The Cover calculator does allow you to calculate your sum insured or declared value using the Dual Wages method. Most industry calculation sheets have a fundamental flaw in them when it comes to dual wages. This problem, arising from turnover growth and wages trends not necessarily being the same has been overcome by the Cover calculator.