Everything You Need to Know About Overhead & Profit (O&P) in a Property Insurance Claim

Overhead and profit, or O&P, is an insurance term typically seen in property insurance claim cases.

But what is overhead and profit? How does it relate to your claim? Today, we’re explaining everything you need to know about overhead and profit as it pertains to your property insurance claim.

Calculating Insurance Claim Value

What is Overhead and Profit?

If you’ve experienced a property loss, then your insurance company will typically reimburse you based on something called ACV – or actual cash value. They’ll look at the loss you experienced, then send you a check for the actual cash value of that loss.

There’s always a debate over what goes into actual cash value. Does ACV include parts, labor, and materials? Or does it just include parts – and the homeowner is expected to pay for repairs out of pocket?

Some insurance policies fail to accurately define repair cost or replacement cost. This leads to a debate over whether or not parts and service is included in your compensation.

There’s also another debate over what’s included in your compensation: is general contractor overhead and profit (GCO&P) included in your compensation? Or are these costs expected to be bundled into the ACV? That’s where the O&P debate comes in.

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Examples of Overhead Expenses

Your general contractor organizes your project. He or she will ensure the work gets completed on-time. The contractor arranges service providers – like an electrician, construction crew, and tile-setter – to ensure your project is finished according to specifications, a budget, and a schedule. For example, if dealing with a fire insurance claim with significant damage to a home, there may be several specialized repair contractors involved in repairing the home to pre-loss condition.

Contractors, understandably, do not work for free. They’re expected to take a certain profit from their projects. Contractors also have overhead expenses. That’s why we call it “overhead and profit”.

Some examples of overhead expenses include:

  • General and administrative expenses
  • Office rent and utilities
  • Office supplies
  • Salaries and benefits for office personnel
  • Depreciation on office equipment licenses
  • Advertising

All contractors are entitled to a profit. They’re also entitled to have their overhead expenses covered.

How Do Insurance Companies Calculate Overhead & Profit?

The ultimate point of overhead and profit is that there’s a certain chunk of money that doesn’t fit into the “actual cash value” of your home. Your insurance policy covers the cash value of your losses – but it might not clearly define how much profit a contractor can earn, nor does it cover the contractor’s overhead expenses. It may be helpful to start with understanding how insurance adjusters estimate damages.

Most property insurance companies provide coverage for replacement costs. However, few insurance companies are contractually obligated to pay more than the actual cash value at the time of the loss. For more in depth information also see Actual Cash Value Vs Recoverable Cash Value.

The big debate boils down to this:

Should a contractor’s overhead expenses and profit (O&P) be included in the actual cash value (ACV) of your loss during an insurance claim? Should your insurance be required to pay O&P? Or are you expected to pay O&P out of pocket?

To answer that question, insurance companies, public adjusters, and policyholders have turned to the courts.

How Does the Law Measure Actual Cash Value?

The central debate of this issue is whether or not the law includes O&P in ACV. To answer this question, courts have developed three primary ways to measure ACV:

Market Value Rule: If the court measures ACV under the market value rule, then ACV will be calculated as the difference between the market value of a property before and after a loss. In other words, it’s the difference between what a buyer would be willing to pay for the property before the loss and after the loss, assuming the buyer has cash in a free and open market.

Broad Evidence Rule: Some courts use the broad evidence rule to calculate ACV. With this rule, consideration is given to every fact and circumstance that defines the value of a given property. The court takes “broad evidence” into account. Some of the items that may be assessed under ACV include the property’s original cost, replacement or reproduction cost, market value, income derived from use of the property, the obsolescence of the property (both structural and functional), depreciation and deterioration, and the opinion provided by qualified expert valuation witnesses.

Replacement Cost Minus Depreciation: Some courts reject both of the rules listed above. These courts calculate ACV based on replacement cost less depreciation. Under this rule, depreciation is deducted from the estimated cost to repair or to replace the damaged or destroyed property. After depreciation is subtracted from the repair or replacement cost, you get ACV.

Most Courts Require Insurance Companies to Pay O&P

Judge Ruling on Insurance Claim PoliciesThe end result of everything above is simple: most courts in the United States have concluded that the insurance company is required to pay GCO&P “in cases where the use of a general contractor is reasonably likely in repairing or replacing a covered loss”– regardless of whether or not the homeowner intends to use a general contractor.

However, some policyholders have to fight for additional compensation. Sometimes, an insurance company will refuse to pay GCO&P.

How to Proceed If Your Insurance Company Isn’t Paying O&P

In some cases, your insurance company might refuse to pay overhead and profit.

In this situation, you may wish to hire a public adjuster. A public adjuster works on your behalf to negotiate with the insurance company. These qualified, certified experts have a proven track record of winning higher claims for clients.

If the insurance company continues to refuse your O&P claim, then you may wish to hire an attorney.

Ultimately, not all insurance companies will pay overhead and profit on your property damage claim. However, with a good public adjuster or attorney, you can fight for every penny you’re owed according to the terms of your insurance contract.

Contact a qualified public adjuster through ClaimsMate today by for a free consultation.

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