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Home Hail Damage Guides for Property Owners ... What You Need to Know About Insurance O&P before Filing a Property Claim

What You Need to Know About Insurance O&P before Filing a Property Claim

negotiating overhead and profit o p

One of the most important – but often misunderstood – components of a property insurance claim is the contractor overhead & profit (O&P) allowance. 

This article will help clarify what O&P is, why it’s important, and how to ensure you’re getting a fair shake in your claims negotiations.


What You Need to Know About Insurance O&P Arguments: In 170 Words

There can be disagreements between insurance companies, property owners, and contractors over what is included in Overhead and Profit (O&P) when it comes to property damage insurance claims. 

O&P includes the general costs of doing business not specific to a particular project, such as rent, insurance, accounting, legal fees, and salary and benefits for administrative staff. 

It is an integral part of a contractor’s bill because it pays for the ongoing costs of running a business and is typically a significant percentage of the total cost.

Insurers may refuse to pay for these costs, arguing that they should not be part of the initial claim payment. Meanwhile, property owners and contractors may argue that these costs are necessary to complete the work and should be reimbursed.

Contractors will often include their O&P costs in their total job estimate to a claimant, but insurers may try to reduce these costs or argue that they should not be part of the claim. There are ways to negotiate this difference of opinion, and it is crucial to have a clear understanding of what O&P entails before making a claim.

This article is intended for business owners who want a better understanding of how insurance works regarding property damage.

For more specific information on your insurance situation, don’t hesitate to contact Citizens Public Adjusters for a free claim review.


Where and How O&P Comes into Play

When you file a property insurance claim, your insurance company will calculate how much O&P they owe you based on how much coverage you have.

The insurance company will also typically make initial payments to the contractor that covers the O&P costs. This can be a source of significant contention between property owners and insurance companies.

Property owners often feel they are being shortchanged by insurance companies when covering the contractor’s O&P expenses. After all, they reason, this is their insurance claim, and they should not have to bear the burden of these costs.

On the other hand, insurance companies believe that they are fulfilling their obligation by paying what is owed for O&P. Also contend that homeowners should not have to pay anything more than the initial insurance payment, as this is intended to cover contractor costs.


Insurance O P: what it is and how it works 

When you file a property damage claim, your insurance company will reimburse you based on something called ACV – or actual cash value. 

This takes into account the actual cash value of the loss you experienced.

But what exactly goes into ACV? Does it include parts, labor, and materials? Or just parts? Homeowners often have to pay for repairs out of pocket, so it’s essential to understand how O&P works.

There are two debates around O&P in insurance claims. The first debate is over the cost of repairs or replacement. Some insurance policies do not accurately define these costs, which leads to disagreements about what is included in insurance payments.

The second debate is about general contractor overhead and Profit (GCO&P). This cost is sometimes bundled into the insurance compensation, but it is expected to be paid by the claimant. This is where the O&P debate comes in.

O&P is generally considered 20% of the contractor’s overall rebuild or renovation cost estimate.

O&P is a Recurring Source of Friction with all Parties Involved

Insurance carriers have historically argued that O&P is only owed if three or more trades (also known as “more than three trades”) are involved repair or replacement of the damaged property (for example, a roofer, a plumber, and an electrician).

They conclude that if three or more trades are involved, the repair work will need a general contractor to manage and oversee the entire operation.

There’s no question that this “rule” is based on something. It’s unclear where it originated, but there may be a case to include these expenses when an expert contractor is engaged, not just when a specific subcontractor threshold is achieved.

Your state’s statutes will determine reasonable recoverable expenses, but it’s fair to request that O&P be paid as part of the payment to repair or replace the damaged property.

There’s also another debate over what’s included in your compensation: overhead and Profit, or O&P. Some people say that general contractor overhead and Profit, or GCO&P, should be included in your compensation.

Others feel that insurance companies should only reimburse you for your damages’ actual cash value (ACV).

Examples of Overhead and Profit

Overhead and Profit in insurance claims refer to general contractors’ money to cover their administrative costs and make a profit. 

This includes expenses like rent, utilities, office supplies, and salaries for office staff. Contractors are also allowed to make a profit on insurance claims, and this money goes towards covering their overhead costs.

Some of the line items (operating expenses) typically included in general contractor’s 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

“10 and 10” – the standard general contractor overhead & profit

Overhead and Profit are two different types of expenses that are frequently associated together. A percentage is assigned to each cost, usually “10 and 10.”

This means that 10% of the entire job cost will be allocated to overhead expenses such as necessary equipment, office rent and utilities, employee salaries and benefits, licenses, and advertising. In comparison, another 10% is set aside for your contractor.

If you act as your general contractor, the insurance carrier is unlikely to reimburse Overhead and Profit on all expenditures incurred in connection with the construction project, even if it’s a covered loss.

How Do Insurance Companies Calculate Overhead & Profit?

The insurance industry typically calculates overhead and Profit by taking into account the fact that there’s a specific chunk of money that doesn’t fit into your home’s “actual cash value” of your home.

This is important because it impacts how much insurance companies are contractually obligated to pay. Most property insurance companies provide coverage for replacement costs, but few insurance companies are obligated to pay more than the actual cash value at the time of the loss.

Overhead and Profit (O&P) is a big topic for insurance claims. The debate usually boils down to this: should insurance companies be required to pay O&P, or are you expected to pay out of pocket? 

There isn’t a clear answer, as insurance companies, insurance adjusters, and policyholders have turned to the courts for guidance.

How the Courts Measure Actual Cash Value

When considering insurance 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.

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

When an insurance company denies a claim for overhead and Profit (O&P), you may need to take further action.

There are a few ways to resolve this dispute:

Negotiate with your insurance company to have them cover a more significant portion of the contractor’s O&P expenses.

If your insurance company is unwilling to cover more of the O&P expenses, you can pay overhead out of pocket and then seek reimbursement from your insurance company.
You could hire a public adjuster who is an expert in insurance claims, makes a strong argument on behalf of the policyholder, and has a proven track record of getting claimants more money.

In certain circumstances, If the insurance company still denies your claim, you may need to hire an attorney.

If you have experienced difficulties with getting your insurance company to cover the full cost of your O&P devices and services, don’t give up hope.

You may be able to get more money from them by working with a public adjuster who knows how to argue on behalf of policyholders.

Citizens Public Adjusters is here to help, so please contact us for a free claim review.

We’ll do everything we can to get you the reimbursement you deserve.

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