Form CP 15 10: Payroll Limitation Or Exclusion
The CP 15 10 Payroll Limitation Or Exclusion endorsement modifies Business Income coverage provided under forms like the CP 00 30 (Business Income (And Extra Expense) Coverage Form) or CP 00 32 (Business Income (Without Extra Expense) Coverage Form). Its primary purpose is to allow the insured to limit or entirely exclude coverage for payroll expenses for some or all employees during a business interruption. This can be a strategic choice for businesses that do not intend or may not need to retain all employees during a shutdown, thereby potentially reducing their Business Income insurance premium. The endorsement specifies whether payroll expenses are excluded or limited to a certain number of days during the "period of restoration". If a number of days is shown in the schedule, payroll expenses are covered for that duration; otherwise, they are excluded.
Classes of Business It Applies To
This endorsement is versatile and can be applied to a wide range of commercial enterprises. It is particularly relevant for businesses with a significant portion of their payroll tied to hourly or non-salaried employees who might be temporarily laid off during a shutdown. Examples include:
- Manufacturing: Companies with a large production line workforce that may not be needed if the plant is inoperable. They might choose to cover payroll for skilled or managerial staff while limiting or excluding it for general laborers.
- Retail Stores: Businesses that can operate with a skeleton staff or may close entirely during a significant interruption might limit payroll coverage for cashiers or stock clerks.
- Restaurants: Similar to retail, a restaurant forced to close due to a covered peril might not retain all its hourly kitchen and serving staff.
- Seasonal Businesses: Operations that have fluctuating workforce needs might use this endorsement to exclude payroll for temporary or seasonal workers who wouldn't be employed during an off-season shutdown anyway.
- Businesses with High Labor Costs: Any firm where payroll constitutes a substantial portion of operating expenses might consider this endorsement to manage insurance costs if they have a clear plan for workforce reduction during an extended outage.
Essentially, any business that, as part of its disaster recovery or business continuity planning, anticipates not continuing full payroll for all employees during a period of restoration could find this endorsement beneficial.
Special Considerations
There are several important factors to consider when utilizing the CP 15 10 endorsement:
- Impact on Coinsurance: Excluding or limiting payroll will reduce the amount of Business Income coverage needed to satisfy coinsurance requirements. It's crucial to accurately calculate the remaining payroll expenses that are covered to avoid a coinsurance penalty. The endorsement clarifies that for coinsurance purposes, payroll expenses will not include the excluded "ordinary payroll expenses" (or all payroll if fully excluded), except for any payroll covered during a specified number of days.
- Definition of Payroll: Prior to a 2012 revision, the form was titled "Ordinary Payroll Limitation or Exclusion" and focused on non-managerial employees. The current CP 15 10 is broader and can apply to any category of employees or job classifications as specified in the schedule. "Ordinary payroll expenses" typically include payroll, employee benefits directly related to payroll, FICA payments, union dues paid by the employer, and workers' compensation premiums. Excluded from this definition are usually officers, executives, department managers, and employees under contract, unless specifically added by schedule.
- Number of Days: If payroll is limited to a specific number of days, these days do not need to be consecutive but must fall within the "period of restoration." This offers some flexibility if a business has intermittent payroll needs during recovery.
- Strategic Decision: The choice to limit or exclude payroll should be a deliberate one, weighing the premium savings against the potential cost of losing and re-hiring/training employees if the shutdown is prolonged. Factors like the local labor market, employee skill levels, and the anticipated length of a typical restoration period should influence this decision.
- Clarity in Scheduling: It is vital that the schedule clearly indicates which job classifications or specific employees are subject to the limitation or exclusion, and the number of days for which payroll coverage (if any) applies.
For example, a hotel might choose to exclude payroll for housekeeping and front desk staff if a major fire requires a six-month closure, but continue to cover salaries for its general manager and maintenance supervisor who are critical for overseeing repairs and reopening. They might opt for a 30-day payroll coverage for some mid-level managers to assist in the initial recovery phase.
Key Information for Agents and Underwriters
Agents and underwriters should pay close attention to the following when dealing with the CP 15 10:
- Premium Impact: The primary driver for an insured to request this endorsement is premium reduction. Underwriters need to assess the reduction in exposure accurately. The Business Income Report/Worksheet (like the CP 15 15) should reflect the payroll exclusion or limitation when calculating the necessary limit of insurance.
- Risk Assessment: Understanding the insured's rationale for limiting payroll is important. Is it a well-thought-out part of their continuity plan, or a purely cost-cutting measure that could leave them vulnerable? Businesses in industries with highly skilled labor or tight labor markets might face significant challenges if they lay off key staff and then try to rehire.
- Coverage Gaps: Agents must clearly explain the implications of limiting payroll. While it saves premium, it also creates a significant uninsured exposure if the insured later decides they need to retain employees for longer than the covered period or employees they chose to exclude. Ensure the insured understands that Business Income forms (CP 00 30, CP 00 32) inherently cover payroll as a continuing normal operating expense unless modified by an endorsement like the CP 15 10.
- Underwriting Guidelines: Underwriters should verify that the requested limitation or exclusion aligns with the nature of the insured's business and workforce. For instance, a professional services firm heavily reliant on all its employees might be a riskier candidate for a broad payroll exclusion than a manufacturing plant with a more easily replaceable workforce segment. The underwriter should also ensure the Business Income Coinsurance percentage is appropriate given the payroll modification.
- Worksheet Accuracy: The Business Income Worksheet (CP 15 15) is crucial. It must accurately reflect the payroll that will not be continued, or will only be continued for the limited period specified in the CP 15 10. This ensures the correct calculation of the Business Income values and the appropriate limit of insurance.
- Alternatives: Discuss alternatives if the insured is hesitant. For instance, they might limit payroll for only certain easily replaceable job categories rather than a blanket exclusion, or choose a longer period of coverage (e.g., 90 or 180 days instead of 30 days) if the premium impact is acceptable.
For underwriters, a key consideration is the moral hazard. If an insured significantly undervalues their payroll exposure to save premium, it could lead to dissatisfaction and financial hardship at the time of a claim. Thoroughly reviewing the insured's operations and their rationale for using CP 15 10 is essential.