If your insurer is offering to settle part of your claim, but refuses to
pay overhead and profit costs, you may have a claim for breach of contract.
Overhead and profit is generally charged by contractors, and so as a policyholder,
it is ultimately part of your cost. O&P, as it's called, is typically
20% of the total amount of the estimate. The two most common questions
that arise when dealing with this issue in the coverage context are:
1. Whether overhead and profit is owed at all on a claim (which depends
almost entirely on the policy you have), and
2. Whether initial payments of actual cash value amounts should be included
in these amounts.
The typical rule of thumb used in insurance adjusting has been that O&P
is owed when three or more trades are involved in the repair process.
Insurers have historically reasoned that when three or more trades are
involved, a general contractor might also be necessary to coordinate and
oversee the repair process, and therefore, the O&P is appropriate.
The precise origin of this arbitrary rule is unclear. However, it does
not seem to have any support in law in most states.
While jurisdictions take different approaches to all such questions, Texas
courts have addressed the question of O&P in a federal court case
decided in 2001 called
Ghoman v. New Hampshire Insurance Company
. In this case, the federal court addressed the issue from the perspective
of the interplay between overhead and profit and the amounts owed under
the actual cash value and replacement cost value provisions of the policy.
The Court concluded that replacement costs, from which any depreciation
would be deducted, should include any cost that an insured is "reasonably
likely to incur" in repairing or replacing a covered loss. Overhead
and profit and sales tax, it stated, clearly fit into this definition
and should be included in both the replacement cost and actual cash value amounts.
While the issue is far from settled, the state of the law (in Texas, for
now) is overhead and profit should be paid. If your insurer is refusing
part of your claim on this basis, call the attorneys at Daly & Black,
P.C. for a free consultation.