Overhead and Profit: Its Place in a Property Insurance Claim

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In the more recent case of Lukes v. American Family Mutual Ins. Co., the court observed, “The policy at issue in this case does insure the Plaintiff in ‘the amounts it would cost to repair or replace covered property with material of like kind and quality ... .’ Note that the policy does not say, ‘the amount which it did cost to repair or replace ... .’ Thus, the Court rejects the Defendant’s argument that it does not have to pay sales tax unless and until the Plaintiff actually replaces the contents.”

In its ruling in Tritschler v. Allstate Ins. Co. , the court offered some additional perspective on the issue. It wrote that “actual cash value is an estimate of the needed repairs; the determination of actual cash value is not based upon what the insured actually pays to repair or replace the damaged property. Therefore, the amount an insured ultimately spends to make needed repairs, if any, is irrelevant.” Finally, as the court concluded in Mee v. Safeco Ins. Co. of America , it can hardly be said “that an insured reaps a windfall by obtaining payment of actual cash value determined in a fair and reasonable manner when that is precisely what the insurer has agreed to pay under its policy in advance of actual repair or replacement. No windfall occurs where insureds receive benefits for which they have paid and to which they are entitled, even if repair or replacement costs are not incurred.”

Minority View: Payment Not Required Unless Incurred

A minority of courts have rational- ized that overhead and profit are “non-damage” factors that have no relation to the value of the damage. In their dim view, these represent only the cost or expense that would be incurred if repair or replacement were involved.

That rationale has been roundly criticized in at least four cases. The “majority view” courts have explained that the estimate of the ACV is just that — an estimate. Certainly, the insured has not incurred the cost of contractor’s overhead and profit at this point or, for that matter, the cost of labor or materials. Logically speaking, it makes no more sense to exclude one on the grounds that it is a “non-damage factor” and not the other.

But even more importantly, by applying the “minority view” logic, an insured who opts not to repair or to replace the damaged property would not incur any expenses, including the cost of building materials. As such, the insured would collect nothing under an ACV settlement, thereby rendering coverage illusory.

The two “minority view decisions“ — Karl v. State Farm Fire and Casualty Co. , and Snellen v. State Farm Fire and Casualty — also were based on an application of the “broad evidence” rule, for which there is no single measure of ACV.

“The nature and extent of the damage and the number of trades needed to make repairs are key factors in determining whether use of a general contractor is reasonably likely.”


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