In the property insurance claim, there is occasional room for debate between policyholders and their insurers. Questions may arise about what to repair or replace or there can be uncertainty over the fairest and most reasonable methodology used to calculate the actual cash value loss (ACV).
There might also be discussions over which expenses contribute to an ACV estimate – labor, materials, and one that readers of the Adjusting Today article entitled “Overhead & Profit” might find particularly interesting and useful – general contractor overhead and profit.
It is also common for insurers to: “…withhold, exclude, deduct or fail to include the cost of general contractor’s overhead and profit, in their calculation of the repair or replacement cost…”
In business, overhead, overhead cost or overhead expense refers to an ongoing expense of operating a business (also known as Operating Expenses - rent, gas/electricity, wages etc). The term overhead is usually used to group expenses that are necessary to the continued functioning of the business, but do not directly generate profits.
Overhead expenses are all costs on the income statement except for direct labor and direct materials. Overhead expenses include accounting fees, advertising, depreciation, insurance, interest, legal fees, rent, repairs, supplies, taxes, telephone bills, travel and utilities costs. Wikipedia
A general contractor oversees the entire construction project and overhead expenses are part of the costs incurred to operate the business. The general contractor is also entitled to a profit, which is the difference between the cost and the selling price. In addition, there is an existing industry standard that provides for contractor’s overhead and profit at 20% of a repair/replacement estimate.
Citing compelling case law, state insurance commissioner bulletins, and accepted insurance industry practices, the aforementioned article brings us an insightful discussion of the various conditions and circumstances that support the inclusion of contractor overhead and profit in the cost to repair or replace.
Although many insurers routinely pay for contractor overhead and profit more than three trade categories of specialty contractors/subcontractors are needed, a strong argument can be made of including the costs of contractor overhead and profit in every loss when the replacement cost less depreciation rule is used. At the very least, insureds should receive some compensation for the time spent and the expenses incurred while acting as their own general contractor in losses where the services of a general contractor normally would not be utilized.
Adjusting Today is provided free of charge as a public service by Adjusters International, Inc., disaster recovery consultants. It is provided for general information and is not intended to replace professional insurance, legal and/or financial advice for specific cases.
Experience, professionalism, and a deep-seated commitment to customer service are the hallmarks of our industry leadership. Adjusters International boasts more senior and certified public adjusting professionals than any other organization of its kind. Our FEMA recovery team is staffed by top-notch specialists with proven, on-the-ground expertise, whose sights are focused on making sure clients receive every dollar of funding for which they are eligible. Together, the Adjusters International team represents some of the best and most experienced minds in their fields.