There are so many misconceptions about the overhead and profit from insurance claims. The question is whether the contractors can claim overhead and profit on every insurance. The real answer is “no”. The real scenario is that you have to understand the fundamentals and complicated of getting overhead and profit from insurance providers.
What is Overhead and Profit (O&P)?
Overhead, and Profit (O&P) are the expenses that contractors bear in a particular duration while planning, managing, and executing a venture.
Overhead covers all the indirect costs of running a precise business for instance utilities, insurance, office rent, staff salaries, marketing, and advertising costs. Legal fees and fixtures. On the other hand, profit means whatever the contractors have earned for their professional expertise and skills, and the overall efforts and risk they take while finishing the project.
These are the two fundamentals and the most essential components for the financial stability and growth of any contracting business.
Why is Overhead and Profit (O&P) Significant in Insurance Claims?
In the context of insurance claims, O&P refers to the additional costs that insurance companies should cover when you’re repairing or rebuilding a structure. When a disaster, such as a fire or storm, damages a property, insurance claims typically cover the actual cost of repairs, including materials and labor.
This has to be understood that many contractors don’t realize its importance and overlook adding these claims as Overhead and Profit. These are the legitimate costs of doing any business and they must have been added to the insurance claims.
How to Get Overhead and Profit (O&P) into Your Insurance Claim?
⦁ Document Everything: The first step in including O&P in your insurance claim is thorough documentation. Keep meticulous records of all project-related expenses, including invoices, receipts, and payroll. This will substantiate your claim.
⦁ Know Your Policy: Familiarize yourself with the insurance policy. It may explicitly state that O&P is covered, or it may not. If it’s not mentioned, you’ll need to negotiate with the insurance company to have it included.
⦁ Provide a Detailed Estimate: When submitting the insurance claim, provide a detailed estimate that clearly outlines the costs of materials, labor, Overhead, and Profit. This step of transparency and detailing will make it super easy to claim your request. Moreover, it will also give the insurance adjuster a clear picture of your request.
⦁ Support Your Claim: To strengthen your case, you can provide evidence of industry standards. Show that including O&P is a common practice in the construction industry. This can be done by presenting documents from professional associations or industry publications.
⦁ Negotiate Effectively: Be prepared for negotiations with the insurance company. Understand the importance of O&P in ensuring that your business remains financially stable and can continue providing quality services. Be persistent and polite during negotiations, and be willing to provide additional documentation or clarification if necessary.
⦁ Consider Specialized Assistance: If at any point in time, the negotiations get disturbed, stall, or develop into a complex case, it is advised to onboard a professional public adjuster or legal counselor to remove the roadblock during the insurance claims. They can share their insightful and valuable guidance and support in clearing your O&P.
How the Courts Measure Actual Cash Value
When considering insurance Overhead and Profit (O&P) in an ACV calculation, the courts use one of three primary methods:
⦁ Market Value Rule
This measures ACV as the difference between the market value 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
The broad evidence rule is a legal principle used in some court cases to calculate the actual cash value (ACV). This rule considers all the relevant facts and circumstances that define the value of the property.
These may include the original cost of the property, its replacement or reproduction cost, market value, income derived from its use, and the obsolescence of its features (both structural and functional). The opinion of qualified experts may also be taken into account.
⦁ Replacement Cost Minus Depreciation
When calculating the insurance value of property damage, there are two primary considerations: replacement cost and depreciation.
Some courts will disregard one or both of these values to calculate insurance value. The most common rule is to use replacement cost as insurance value but subtract depreciation from that cost. This gives you ACV or actual cash value.
Another option is to use the cost of repair or replacement, minus depreciation, to calculate insurance value and insurance benefits due.
This rule is less common, but some courts feel that it better represents the actual cash value of the damaged or destroyed property. Whichever method is used, depreciation should always be factored in when calculating insurance value.
This ensures that you are not over or under-compensating for damages.
How Most Insurance Disputes get Resolved
In almost every insurance claim where the use of a general contractor is likely, the insurance company must pay for GCO&P. This includes cases where the property owner does not use a general contractor.
However, sometimes insurance companies refuse to pay for GCO&P. In these cases, policyholders have to fight for the additional compensation they are owed and collect insurance benefits.