Ordinary payroll coverage is a common endorsement in many property and business interruption insurance policies. It provides coverage if a policyholder wishes to retain key hourly employees who are completely idled after an incident and unnecessary to continuing operations.

Recently, however, insurance companies have misconstrued ordinary payroll coverage in the claim process, seeking to turn this coverage extension into a coverage exclusion. 

A business interruption loss in a property and business interruption policy is often defined as “the reduction in business income, less charges, that do not necessarily continue during the suspension of operations.”

Often, labor costs for hourly employees are necessarily incurred during a loss. With ordinary payroll coverage, however, the policyholder need not show it was “necessary” to continue to pay employees. The coverage is typically available for 30, 60 or 90 days and is generally defined as “the entire payroll expense for all employees of the insured, except professionals, officers, executives, department managers and employees under contract.”

Some insurers contend that all hourly payroll incurred after the time period specified in the ordinary payroll endorsement is not claimable. For example, if the insured purchased 60 days of ordinary payroll coverage, they contend that any hourly payroll incurred after the 60 days is not claimable, regardless of whether the employees were necessary to continue normal operations. This inappropriately seeks to use a coverage extension to exclude coverage. The initial question is whether it is necessary to continue payroll; only if this is answered in the negative would the policyholder need ordinary payroll coverage. As a practical matter, when a loss occurs, especially a partial loss, many hourly employees are necessary to continue normal operations.