The issue of whether or not to continue paying employees during a business interruption loss is one of the most difficult for my clients. On the one hand, many of my clients have real empathy for their employees, and treat them like family. When their business experiences a loss, they don’t want to see their employees suffer through a suspension of wages. On the other hand, these same employers seldom want to see their employees sitting around, collecting a paycheck, but doing nothing. “Ordinary payroll” coverage can help, but there are issues that business owners should be aware of. Let’s look at the following scenario:
Let’s say, for example, that you have a retail operation with multiple locations. One of the locations is damaged and has to be closed for several months. You have ordinary payroll coverage in the business interruption portion of your policy. You decide to send the employees to the other stores because you don’t like the idea of paying someone to sit around on their behind. Even if they add no value to the other location, it’s OK because you have coverage for their wages. No problem. What could possibly go wrong?
A lot! You have just opened a Pandora’s box with valuing and supporting you business interruption loss. Had you sent the employees home, and continued their pay, you would simply have to show that you have no sales, who was paid, and how much they were paid. Since you didn’t do that, the insurance company will usually assume that your received economic benefit for utilizing the employees at the other locations. You may still be able to recover their wages, but you will most likely have to prove to the adjuster:
- There was no increase in sales at the other location due to the presence of the employees from the damaged store.
- No employees at the undamaged store had reduced hours as a result of the presence of the employees from the damaged store.
- No planned “new hires” at the undamaged store were delayed as a result of the presence of the employees from the damaged store.
The documentation to support the items listed above adds another layer to the loss valuation and more headaches for management. While you may be able to successfully deploy these individuals to the other stores, the decision, and the necessary record keeping should be discussed with an educated, experienced, and credentialed forensic accountant and your insurance adjuster.
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In a word: “Y E S” (keep paying your employees).
The blog excellently points out the need for business interruption insurance and some of the consequences of failing to read the “small print” (including a requirement for in-depth record keeping prior to an event).
Skilled, talented employees are a valuable resouce and can be expensive to replace, especially when customer loyalities are involved. As an enterprise risk management practitioner, I recommend to all clients to consider the blog question and to create – and publicize – policies and procedures covering disaster event-related issues (furloughs, over-time, communications, and much, much more).
A very good question that requires thoughtful consideration BEFORE an event.
John Glenn, MBCI
JohnGlennMBCI at gmail. com