Filed Under:Claims, Education & Training

Overhead and Profit

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.

Featured Video

Most Recent Videos

Video Library ››

Top Story

15 tips for driving safely on ice and snow

More than 800 people die each year in the U.S. in vehicle crashes caused by snow, sleet and freezing rain.

Top Story

PIA's national president was born to insure

Robert W. Hansen Jr., a fourth-generation insurance professional, reflects on what drives him to keep selling after more than 30 years in the business.

More Resources


eNewsletter Sign Up

Claims Connection eNewsletter

Breaking news on disasters, fraud, legal trends, technology, and CE initiatives for the P&C claim professional – FREE. Sign Up Now!

Mobile Phone

Advertisement. Closing in 15 seconds.