Many of the questions coming to FC&S deal with whether or not overhead and profit (O&P) should be paid on a loss when less than three trades are involved. Others deal with whether O&P should be deleted in its entirety from an actual cash value settlement under a replacement cost policy. Still others have different twists, but all of them focus on insurer guidelines for how O&P should be treated when adjusting claims.
For example, a Wisconsin subscriber phrases it this way:
Before discussing this issue, let's take a moment to outline just what O&P entails. According to the glossary in the book, Insuring to Value, 2nd Edition, which was written by MSB president Peter M. Wells, there are two types of overhead: general overhead and job-related overhead.
General overhead relates to a broad variety of costs typically involved in doing business, such as office staff, office rent, office supplies and equipment, sales, marketing and advertising costs, and finance charges. Job-related overhead refers to costs other than labor and material costs that are directly related to a specific project, such as building permits, fees and inspections, utility hook-up charges, construction drawings (blueprints), surveys, erosion control (silt fences, etc.), construction driveway, culvert or curb cut, interior cleaning of the building prior to occupancy, and site security.
A 2006 case from the Pennsylvania superior court, Mee v. Safeco Ins. Co. of America, analyzes a similar question of whether an insured was entitled O&P when the insured repaired the damage himself. In that case, the insured owner was not a contractor, but the court still felt he should be able to recover O&P.
The court emphasized that the insured had paid a higher premium for replacement cost coverage, which entitled him to O&P when use of a general contractor would be reasonably likely, even if no contractor was used or no repairs made.
The court said the answer to this question rested on whether use of a general contractor was "reasonably likely," which was a question of fact for a jury to decide. The Gilderman court established an objective standard by which an insurer could determine, "on a case-by-case basis," whether to pay O&P.
Using this logic, the Mee court said the operative issue was the reasonable likelihood of a general contract being used, not whether or not the homeowner did the work himself. As a practical matter, adjusters tell us that several software programs use the construction standard of three trades as a rule of thumb on the payment of O&P. But nowhere in any insurance policy have we ever seen these specific words.