Rather than insure wages, some business owners opt to only insure severance pay. The cover meets the cost to the business of the wages in lieu of notice that has to be paid to employees on retrenchment.
A word of caution though. The cover does not provide any protection to the Insured for the accrued benefits payable to an employee such as holiday pay, sick pay, long service etc. These expenses have been expensed and accrued in view of the employment of the staff member before the loss. What the cover only provides, as explained above, is the payment in lieu of notice, payable to a staff member if they are retrenched in the event of a loss.
What many business owners and managers overlook is that to retrench staff, even with severance pay cover in place, a significant amount of cash is required. This is at a time when in all likelihood the major physical asset of the business is destroyed and while there are many competing demands on any cash reserves while finance companies will be reluctant to loan further monies without fresh security.
It is at this time that management realise that they need more staff to revive the business than they thought and rather than retrench staff they wished they had insured staff more fully.
In some cases, Severance Pay cover is combined with a Dual Wages cover. This combination is not necessarily the best option in every case. To obtain greater flexibility for the same premium, either the Initial Period could be extended, or the percentage of Wages for the Remainder Period could be increased. This then allows the Insured greater flexibility in the event of a loss.
Severance pay can still be paid and claimed as part of a Dual Wages claim. The savings in Wages from the date of the dismissal would typically be greater than the severance pay. Therefore, the Insurer would meet the cost as the overall benefit, ie. the amount paid under the claim would be less than if the staff member were retained. This does require the decision on whether to retain or dismiss staff, to be taken relatively early after the loss to achieve the savings. It would not be of benefit if the staff were retained for three months and then let go.
The benefit to the Insured is that the insurance cover can be claimed as a Wages claim if the staff are retained. Another benefit is that the option to consolidate period is longer, thereby giving greater cover for short-term disruptions.
For more discussion on Dual Wages insurance refer to Business Insurance and Claims – A Practical Guide, one of the many books available to order over the net from the LMI Group.
If severance pay is being considered, whether it be to insure separately or when considering the Initial Period under a Dual Wages cover, the average length of employment for the company’s workforce needs to be considered. Another consideration is the awards that may apply to the retrenchment of staff.