There are several ways that Wages can be insured. The reality is that the reason for this is to minimise the cost of insurance.
The ‘it will never happen to me’ approach to business and life in general is alive and well. Every week, people buy lottery tickets believing their turn is about to come – someone has to win, why not me? Statistically, it is more likely that their business or place of employment will suffer a crisis. Yet, when considering this possibility, it is still felt that it will not happen to them. It just goes to prove that the human mind can justify anything.
The most common ways of insuring wages are:
Full insurance of wages for the full Indemnity Period.
Full insurance for short periods of disruption.
Only part-insurance because of the likelihood of significant savings in wages.
Whatever method is adopted, a business should cater for the insurance of key or essential staff, plus severance pay of non-essential staff during the initial weeks following the damage. As has been repeatedly stated, total flexibility is only achieved by insuring Wages in full for the entire Indemnity Period.
In the following sections, the benefits and disadvantages of each method are discussed.
FULL WAGES COVER
In this situation, full insurance of Wages is arranged for the entire Indemnity Period. That is, it is fully included under the Gross Profit item.
The benefits are that in the event of a loss, one of the biggest, if not the biggest, ongoing expenses to the business is fully insured. It allows management to use labour to reduce the period of disruption and eliminates the time spent in re-recruiting and training.
As an Insurance Broker, Agent or Insurer’s Representative, you are only offering your client full protection when Wages are fully insured. In addition, you are increasing your commission, while at the same time lowering your professional indemnity exposure. The disadvantage is cost. As wages are a large expense to a business, there is a cost to insure it. This brings us back to a cost-benefit analysis or the ‘eat well or sleep well’ principle.
One final tip is that if Wages are to be fully insured, leave it as part of Gross Profit to avoid an item forming part of the policy definition of Payroll or Wages, being omitted.
The only way to provide a company with all the flexibility possible is to insure Wages 100%. It can be left as part of the Insured Gross Profit Sum Insured. Your insurance broker, adviser or agent should be able to provide detailed advice to you.
When considering what is best for you, keep in mind that no one remembers the price when the loss happens; everyone just wants the Rolls-Royce cover. With wages fully insured you are well on your way to having the premium cover.