One common problem that has been arising is when overhead and profit should be paid in response to a property insurance claim. For those not aware, overhead and profit (generally estimated at 20% of the total amount of the estimate) is intended to cover the overhead/operating costs of a general contractor as well as the amount of profit that the general contractor typically receives.
The longstanding rule of thumb used in insurance adjusting for years is that overhead and profit is owed if more than three trades are involved in the repair process (e.g., a roofer, a stucco repair company, and an air condition contractor). Once there are three trades involved insurance carriers typically presume that a general contractor would be necessary to coordinate and oversee the repair process. Where and when this three-trade “rule” came into being will likely never be known, however, it does not seem to have any binding authority in most states.
So why is it that some insurance carriers flat out refuse to pay O&P?
Some carriers feel a project doesn’t warrant the use of a general contractor. Others, knowing well up front that a project has enough trades and complexity to justify hiring a general contractor, will still not apply O&P to their estimate initially, waiting for the property owner to show evidence they are actually using a general contractor first.
However, even when that evidence is presented, some carriers will agree to the O&P markup on certain trades, but not on others. The trade they usually dispute is roofing, and sometimes guttering too. Their argument is usually along the lines of, “O&P are already included in unit costs for those particular trades, therefore they do not qualify for additional O&P.” That is a weak argument because, while it is true that a certain amount of what Xactimate calls “job-personnel overhead” is included within the unit costs (i.e. per square/square foot/linear foot/etc), it is not the same as the O&P markup.
Per Xactimate’s “White Paper” on O&P published 05/01/2011, “Job-personnel overhead” consists of vehicle costs, mobile phone costs, depreciation on tools, profit correlating to an employee performing a certain billable task, etc., whereas the O&P markup consists of expenses that can’t be attributed to a project itself, like general and administrative expenses, rent, utilities, salaries for office workers, etc. The former are expenses incurred by whichever contractor performs the work (whether a subcontractor or general contractor), while the latter are expenses incurred only by the general contractor.
In light of this, if an insurance carrier believes certain trades will be performed “in-house” rather than subcontracted out, then their argument to withhold O&P on those trades might hold water. However, if there is no indication those particular trades will be done “in-house,” then their argument seems a bit unfair.
In any case, O&P seems to always be a challenge with certain insurance carriers, and there’s never a guarantee an adjuster will agree to it if you include it in your supplement. Nevertheless, if you are a general contractor planning to outsource a particular trade, then O&P applied to that trade would seem to be warranted and well worth arguing for.
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