Rather than define who are essential staff, another method of insuring wages that has been adopted is to insure only a percentage of wages for the Indemnity Period. For example, 15% of wages are insured as part of the Insured Rate of Gross Profit. This means that the remaining 85% of the wages expense are not insured from day one, regardless of whether the disruption is minor or extended. This exposes the business to a major risk, and is only marginally better than not insuring wages at all.
To do this 85% of wages in this example would be shown as an Uninsured Working Expense on the Policy Schedule.
When part wages are insured it often means that part of the ongoing wages becomes the Insured’s responsibility. The reason for this is that often the percentage chosen is too low. In one recent case only 15% of wages where insured when it should have been closer to 70%.
To minimise the uninsured loss, the Insured needs to make decisions to dismiss or stand-down staff as quickly as possible after the loss. Quite often, all the facts are not known and a decision is made too quickly, with long-term adverse effects to the business.
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.
From past experience, it is usually found 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.