“Overhead and profit . . . is an integral part of many claims and we believe it should be within the appraisers and umpires discretion in the determination of the actual value of the loss to consider contractors overhead and profit.” Putich, Mark, Fire Insurance Exchange, Texas Farmers Insurance, Co. “Re: TX Appraisal.” Letter to Texas Department of Insurance. 11 June 2014.
The cite above comes from Texas Farmers’ Insurance Company’s response letter to objections levied by the Texas Department of Insurance to one of Farmers’ newly proposed endorsements. The objection raised by the TDI is “Objection: Regarding 8.h.(7),” which appears to be the TDI’s response to an Farmer’s attempt to preclude from appraisal the consideration of overhead and profit. Farmer’s formal response to the objection is “Response: We have removed the line in question.”
The Texas Department of Insurance has provided some guidance on the issue. Interestingly, it begins with the concept of indemnity being the ‘basis and foundation of insurance coverage.’ Texas Dep’t of Insurance, Commissioner’s Bulletin No. B-0045–98 (June 12, 1998). “The objective is that the insured should neither reap economic gain nor incur a loss if adequately insured. This objective requires that the insured receive a payment equal to that of the covered loss so that the insured will be restored to the same position after the loss as before the loss.’ Id. The value of contractor’s overhead and profit, as well as sales tax on building materials, has been included in the limit of liability for which the insured has paid a premium.’ Id.
At least one court has held ‘repair or replacement costs include any cost that an insured is reasonably likely to incur in repairing or replacing a covered loss. Contractor’s overhead and profit and sales tax clearly fit this definition.’ Ghoman v. New Hampshire Ins. Co., 159 F. Supp. 2d 928, 934 (N.D. 2001). One might note that neither the Texas Department of Insurance nor the court in Ghoman limited the recovery of overhead and profit to ‘general’ contractors. See also Texas Dep’t of Insurance, Commissioner’s Bulletin No. B-0068–08 (September 29, 2008) (‘The deduction of prospective contractor’s overhead and profit . . . is an improper claim settlement practice. . .’)(emphasis added).
Insurers Mistakingly Believe GCOP is as a Charge Attributed Directly to Work Being Performed
Contrary to what most adjusters claim, overhead and profit is viewed as an additional cost and not attributed directly to work being performed (there is no ‘is it necessary’ relative to the tasks to be performed requirement).
“For individual trades, Overhead is any additional expense not charged (attributed) directly to the work being performed. Overhead is typically classified as an indirect cost. Profit is formally defined as “the excess of the selling price of goods over cost. When Xactware performs market research on unit prices, those surveyed are specifically asked to not include expenses that would be included in the General Overhead and Profit markup percentages.” See Xactware, White Paper, Overhead and Profit, 06/01/2011.
Issue: Is OP a cost ‘reasonably’ likely to be incurred?
Reasonably foreseeable in this case refers to the frequency or likelihood O&P would be a cost a hypothetical insured in the same geographic market would incur for the type of work the policyholder is requesting the contractor to perform. Essentially, this analysis is a form of fair market value. In Texas, fair market value is evidence of reasonableness.
Whether the insurer or its appraiser believes the indirect cost (O&P) is unnecessary is irrelevant–the market decides whether and/or at what percent markup this indirect charge (O&P) is likely to be incurred in the insured’s geographic market for the nature of the work requested.
The fact that when Xactware performs market research on unit prices, those surveyed are specifically asked to not include expenses that would be included in the General Overhead and Profit markup percentages is also telling.
Something to Consider: Is O&P included as a component of the going rate in the market?
The use of Xactimate “only” pricing is limited in its application as it openly omits contractor overhead and profit. It is difficult to envision any scenario where a business would pay everyone else but itself. Even suggesting a market exists that excludes profits or payment for overhead is paradoxical given the insurance restoration market operates under an economic system in which private actors own and control assets in accord with their interests, and demand and supply freely set prices. You can’t have a “going rate” if you don’t have a market–and you won’t have a market if you don’t allow providers of goods and services to cover indirect costs and show a profit. Conversely, the mere existence of a market supports the conclusion that profit and overhead are baked into the cost of the goods and services provided. The issue appears to be not so much about whether O&P is a cost reasonably likely to be incurred, rather what is the percentage markup likely to be charged.
Would it be helpful if an appraiser had sufficient experience working as a contractor in the market at issue for the appraiser to have first hand knowledge of the market’s going rate for O&P (percentage markup) for a job of this nature? Of course. Is it 10/10?
Whether O&P is a charge reasonably likely to be incurred and at what percentage markup is an “opinion,” and each member of the panel is entitled to their own opinion. In the end, however, the best supported position should (in theory) prevail.
Disclaimer
This article is for informational purposes only and not for the purpose of providing legal advice. You should contact your attorney to obtain advice with respect to any particular issue or problem. Use of and access to this article or any of the e-mail links contained within the site do not create an attorney-client relationship between Thomas W. Hamrick and the user or browser. The opinions expressed in this article are the opinions of the individual author and may not reflect the opinions of other lawyers.
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