Overhead and Profit: Its Place in a Property Insurance Claim

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...insurance policy authorizing them to do so, some insurers withhold, exclude, deduct or fail to include the costs of GCO&P in their calculation of the repair or replacement cost used to arrive at an ACV estimate and settlement of a claim based on the replacement cost less depreciation rule.

These insurers take the position that the overhead and profit costs of a general contractor are not components of repair or replacement cost unless and until they are actually incurred. They maintain that an insured could receive what amounts to a windfall if permitted to recover a repair or replacement cost that may never actually be incurred.

However, opposing points of view from respectable insurance industry professionals have been circulating for some time now. Recent case law and two separate state insurance commissioner bulletins, along with long-accepted customs and practices in the insurance industry, conclusively establish that GCO&P should be included in the cost of repair or replacement in order to arrive at an ACV estimate and settlement.

Majority View: Payment Required if Use is Likely

The majority of courts that have considered the issue have concluded that payment of GCO&P is required where the use of a general contractor is reasonably likely in repairing or replacing a covered loss, even if no general contractor is used or no repair or replacement is made . The nature and extent of the damage and the number of trades needed to make the repairs are key factors in determining whether use of a general contractor is reasonably likely. This requires some consideration of the degree to which coordination and supervision of trades are required.

A number of cases that went before the courts involved replacement cost policies. However, the policies expressly provided that until the damaged or destroyed property was actually repaired or replaced, the insurer’s obligation was limited to an ACV payment. Under the policies in those cases, the insurer also was obligated to make an ACV payment to policyholders irrespective of whether they actually repaired or replaced the damaged or destroyed property. Accordingly, the issue in those cases was the amount the insurer agreed to pay to its insured prior to actual repair or replacement. It agreed to pay ACV, which the courts in those cases decided meant “repair or replacement cost less depreciation.”

In the 1994 case of Gilderman v. State Farm Ins. Co. , the court stated, “the real inquiry is what is included in repair or replacement costs,” which it answered as “any costs that an insured would be expected reasonably to incur in repairing or replacing the covered loss.”

“Every general contractor is entitled to a profit, which is defined as the difference between the cost of goods and the price for which they are sold. Overhead and profit … is expressed as a percentage of the total construction cost.”


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