Policyholder Question – Applying Overhead & Profit in Property Insurance Claims

by Charles R. Tutwiler on 12/8/2017

The following is an insurance claim question we answered for a policyholder through the United Policyholders Ask an Expert Forum.

Q. Does the insurance company pay Overhead & Profit to the insured in Florida for reconstruction of property damage? What percentage is allowed?

A. On the surface this is a simple straight forward question but not always a simple answer. Let me explain. For as long as I have been in the adjusting business (44 years), the overhead and profit debate has continued ad nauseam. For many years one national insurance company refused to add O&P to a claim settlement unless a general contractor was hired to do the scope of work as dictated by their insurance adjuster. Not surprisingly, a lot of controversy followed and at least for this company they gave up the fight and routinely started adding 10% profit and 10% overhead to most settlements. As an aside, if you apply 10% profit to the price of the scope and then add 10% overhead to that number you actually get 21% of the price of the scope of the estimate.

Going back to your question about Florida; most insurance carriers are applying 10% profit and 10% overhead to estimates. Some however are making a distinction that if at least three trades are not needed in a repair process there will be no overhead included and if you do the work yourself they will not include profit.

This is for the most part simply a unilateral and arbitrary position taken by some carriers to try and reduce their loss ratios. The real story on profit and overhead is that most contractors who work for insurance companies routinely get beat-up on their price operating on profit margins in the range of 35% to 45%. So how do contractors do it? Well, they mark-up each line entry to cover this type of margin. This is no secret, but for some reason the myth lives on that 10 & 10 is the market rate when in fact it is just a simple easy way to account for a cost that everyone agrees must be there. After all, a contractor has to earn a profit on each job and they certainly must account for their overhead.

If you are looking to get 10&10 make sure you can justify three trades in the repair scope. As an example a plumber, an electrician and a carpenter are a few examples.

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Good Evening Mr. Tutwiler: In my case, the insurance adjuster (Team One) added $10,300.00 to my Irma hurricane claim to cover Overhead & Profit. This amount and the ACV were paid to me by Frontline upfront under my Replacement Value hurricane policy. The recoverable depreciation was held back until the work was completed. I required six trades to complete the work...roofer, painter, solar system, plumber, gutters and garage door. I did not hire a general contractor. I dealt with each trade directly. After the roof and painting were completed this past April (2019), I filed my claim for about $1,700.00 additional expenses relating to the roof and painting, plus the recoverable depreciation relating to the roof and painting (approx. $7300.00 RD). There was no dispute with respect to the $1,700.00 add'l expenses. The balance of the work (gutters, garage door, etc.) will be completed this winter/spring. My out of pocket expenses paid to the roofer and painter was only about $400.00 more than the ACV plus recoverable depreciation. Frontline clawed back almost all of my Overhead & Profit recovery relating to the roof and painting and offset it against the Recoverable Depreciation. The result was that I received a check for about $400.00, rather than a check for $9000.00 that I expected ($1,700 add'l expenses plus $7300 recoverable depreciation). Frontline's explanation is that I am only entitled to receive the amount of my out of pocket expenses so, to achieve this result, they can claw back some, or all, of the Overhead & Profit amount previously paid. The effect of this is that older homes with higher depreciation such as our 45 year old bungalow will have almost all, if not all, of the previously paid O & P clawed back, while a newer home with lower depreciation, like my neighbor's 4 year old home, will have very little of the O & P clawed back. In both cases we have acted as our own general contractor. Has my recoverable depreciation claim been properly handled? My home is in Florida.

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Charles R. Tutwiler Thank you for your question, it is a good one as it often comes up in post loss settlements. Your loss likely was arrived at by the adjusting company using a computer software program that applies profit and overhead automatically. Many insurance carriers will pay the settlement without following up to see if a contractor was used. If not, they do not want you to “profit” from your loss. But to my knowledge there is no written rule or policy language that clearly states that if you act as your own contractor you should not be able to collect the profit and overhead. Also, there are many carriers that will apply subjective rules that say if three or more trades are used, you are entitled to overhead and profit. By acting as your own contractor, you are likely giving up other economic opportunities. So, doing the work of a contractor seems fair to me that you should be paid for this effort. First, I would suggest that you write the carrier and ask them to provide you with the policy language that states you are not entitled to the full settlement they calculated for you. You will not likely get this, so you may want to consider demanding Appraisal. Rather than incurring this additional cost, they may settle with you. Remember there are two arguments insurance companies use to dispute this issue. As related to overhead, they will say you do not have overhead of a business. My rebuttal would be that you are incurring costs otherwise not incurred and thus you do have a measure of overhead. The other argument relates to profit, which simply means you are not supposed to profit from your loss. I doubt you would agree you profited from your loss as you did the work of the contractor and perhaps lost profit from other ventures you missed out on by doing your own work. Good luck, be persistent and do not give up. They will most likely work this out with you.

Policyholder Question – Applying Overhead & Profit in Property Insurance Claims

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