Insurers Mistakingly Believe GCOP is a Charge Directly Attributed to Work Performed
Contrary to what most adjusters claim, overhead and profit is an indirect cost. As such, it is an additional cost not attributed directly to work being performed and there is no ‘is it necessary’ requirement relative to the tasks to be performed.
“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.” 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 is a cost a hypothetical insured in the same geographic market will 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.
While there appears to be no Texas case directly addressing this issue, 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. (So, no — overhead and profit is not already included in Xactimate’s component pricing software).
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 excludes contractor overhead and profit from its data base. In the real world, 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. Further, 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, in and of itself, supports the conclusion that profit and overhead are part of the cost of goods and services provided and thus must be included in any estimate. 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.
An experienced contractor in the market at issue has first hand knowledge of the market’s going rate for O&P (percentage markup) for the services offered.
However, whether O&P is a charge reasonably likely to be incurred and at what percentage markup is generally viewed in Texas as an “opinion,” and an insurance company is entitled (at its own peril) to voice its opinion. Disagreements as to the going rate in the market place can be resolved in appraisal or through litigation. In the end, 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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