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.