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You seem to be making a very broad statement, using a very broad brush.

I see properties damaged and repaired every day, with happy homeowners.  Can you get a little more specific on what your beef is, and what estimating software you utilize?

If my roof needs to be replaced - and that is the only trade, I expect to get a quote from a roofer.  The ingredients that go into his bid to "make the sausage" are not that important to me, but I would be kind of surprised as a consumer to see the roofer make a specific comment about overhead and profit at the end of his bid.

The roof on my house is old as dirt.  As a consumer, when I go to replace it - why would I seek out a General Contractor to do that job??  I would seek a roofing contractor, ie a subcontractor to do what I needed to have done.

Xactimate, Marshal-Swift, Craftsman, etc. do market surveys and have been tweaking their unit costs 4 times a year, for quite some time.  It is not a perfect system, but it isn't that far off.  There are phone books full of contractors that focus on insurance type work - and for good reason.  The covered losses are paid for.

The O&P values for subcontractor are included in the unit costs for roofing, paint, etc. Do not confuse this with your initial comment about General Contractor O&P.

I see no reason why an insurance company should pay more than a consumer would want to pay to repair his property.  And although I do not believe an Insurance company should pay a General Contractor's Overhead and Profit for a single trade, I can tell you that I have seen it done.  I have been instructed at a Catastrophe site to allow O&P if the roofer holds a General Contractor license, and I have also been instructed on specific files to allow that markup when doing daily claims under those circumstances.  These type of decisions are made by individual insurance companies based upon a variety of factors, including case law and who is sitting at the desk.

You will encounter some carriers who keep a tighter guard on the purse strings. They refuse to pay more than they owe, and I don't blame them. I have seen several insurance companies go bankrupt over the years. Their business needs to remain solvent just like yours does.

What one can get something accomplished for, and what true loss values owed are, are two very different things.

Imagine you initially built a house you now had to "adjust" a financial loss towards, and it was just the siding you had to account for.

You knew you initially used a siding contractor, who applied his own O&P to the work scope, and you, as the G.C., added your own O&P on top of his.

The siding is damaged by a covered incident. The financially indemnified loss contains the sub and primary contractor O&P cost factors as part of the intrinsic indemnified value.

How do the indemnification / financial dynamics change when you are "adjusting" the actual aggregate financial value of the G.C. / single trade  loss, so that you can claim single trade claim losses do not have G.C. O&P vaules?

I disagree. There is no difference between what a consumer would pay to have their house repaired on the open market as a homeowner, and what I allow for claim value prior to adjustment for deductible, etc.

I live in the real world, and adjust claims in the real world. When I make a settlement, I expect the homeowner to be be able to get his house fixed in the real world. If he needs a GC, then I allow for that. If he doesn't need a GC, then I don't

The circumstance of the original construction arrangement is not relevant to this conversation in anyway.  If you need to replace the carpet in your house, you go to a flooring store.  It is really that simple.  If you have a more complicted project, then someone needs to sequence the trades - and the insurance world acknowledges the need for a GC.

One's can present synthetic loss claim values for a very long time by not understanding and/or reflecting on what is included in calculating anticipated replacement costs of a structure, and corresponding limits-of-liability.

Structures do not come into existence by sub-trades alone. Single trade components insured against financial "loss" contain both the specialty trade contractor and general contractor O&P costs in it.

How can they possibly not?

Ask an honest insurance agent, claim manager, or any builder, to verify those 'real world' facts. 

There have been court cases on this point. It is not universally applied by all Insurance companies the same way.  I have been told to do it both ways.  The longer I stay in this business, the more I learn to be flexible.  Some Insurance companies watch the litigation and change with the times, others may have a manager that is set in stone.

Here is a good reference summary on this issue.

Although there is no express provision in the typical property insurance policy authorizing them to do so, some insurers withhold, exclude, deduct or fail to include the costs of GCO&P in their calculation of the repair or replacement cost used to arrive at an ACV estimate and settlement of a claim based on the replacement cost less depreciation rule. These insurers take the position that the overhead and profit costs of a general contractor are not components of repair or replacement cost unless and until they are actually incurred. They maintain that an insured could receive what amounts to a windfall if permitted to recover a repair or replacement cost that may never actually be incurred.

...The majority of courts that have considered the issue have concluded that payment of GCO&P is required where the use of a general contractor is reasonably likely in repairing or replacing a covered loss, even if no general contractor is used or no repair or replacement is made. The nature and extent of the damage and the number of trades needed to make the repairs are key factors in determining whether use of a general contractor is reasonably likely. This requires some consideration of the degree to which coordination and supervision of trades are required.

...In the more recent case of Lukes v. American Family Mutual Ins. Co., the court observed, “The policy at issue in this case does insure the Plaintiff in ‘the amounts it would cost to repair or replace covered property with material of like kind and quality.…’ Note that the policy does not say, ‘the amount which it did cost to repair or replace.…’ Thus, the Court rejects the Defendant’s argument that it does not have to pay sales tax unless and until the Plaintiff actually replaces the contents.”
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If the link above doesn't work, try this one http://www.adjustersinternational.com/ATpdf/3032_Overhead_and_Profit.pdf 

Getting back to the original post, please note the comment in the litigation: "The nature and extent of the damage and the number of trades needed to make the repairs are key factors in determining whether use of a general contractor is reasonably likely" so I am not advocating O&P on a simple, single trade repair.

This is some of the same litigation that made some insurance companies deviate from the old "3 trades" rule, to something less clear...  based on "complexity" of the project and so on.

Right, there are regional differences. Out of state decisions do not directly apply. In California I have seen some carriers react to out of state decisions in terms of a "precedent" for how it may go for them.

It comes down to the Insuring agreement (policy) and the specific carrier you are working for...  you have to dance with the one that brought you.

Good points Steve. That article I posted above makes an interesting comment:

As the Texas Department of Insurance
so aptly stated in its bulletin,
“if the insurer in determining actual
cash value excludes costs that
are included in the determination
of liability limits, on which the
insured’s premium is based, the in-
surer reaps an illegal windfall because
the insurer receives premium
on insurable values for which loss
may never be paid.”
------------------------------------
The majority of courts that have
considered the issue have concluded
that payment of GCO&P is
required where the use of a general
contractor is reasonably likely in
repairing or replacing a covered
loss, even if no general contractor is
used or no repair or replacement is
made. 
------------------------------------
The spirit of this thing would be to focus on the complexity of the repair, if it truly needs a GC to coordinate the trades. As opposed to the granular issues of who is actually awarded the job, is the homeowner being his own GC, etc.

Mind you I have have had countless examples where a specific insurance company advised me to do exactly what you have said, hold back various things until we see who actually does the job. I do work for Armed Forces Insurance, and there were claims years ago where I go out to the Vandenberg Air Force Base and look at a retired major's home. That carrier had an internal ruling that they only allow minimum wage for work performed by the named insured. Didn't sit to well on occasion.  Today, I would write the estimate for what a contractor would do the work for.

In recent memory, most of the assignments I get will focus on the specific complexity of the damages. If a GC is needed, most people I work with will pay O&P without even asking who is actually doing the work.

I realize things are different in Florida, and when there is no hold-back whatsoever for ACV that can affect how the claim is addressed.

Yikes. I feel like I just stepped in something and tracked it all over the carpet.

I had seen some of those court cases from other sources, couldn't find them, googled it, and that article seemed to quote the case I was looking for.  Now that you mention it, the article is very focused on "their needs".  There are different approaches to this no doubt, and I just try to keep my eyes open, do what the client guidelines say.

I am working 2 fire claims right now, but not in the area Tom was working down by San Diego.  The IA that I am with didn't have a replacement for me in northern California, so I am still sleeping in my own bed, doing local claims.

OK, after unknowingly stepping in the "PA Poo" I found another reference. This is one that most of us received in the mail with the January 2007 issue of Claims Mag. It cites some of the case law that I was familiar with, and is wrtten by a CPCU, editorial director of Fire, Casualty & Surety Bulletins.

This may have nothing to do with you folks in Florida, but here's the point that Steve touched on, with the homeowner doing his own repair:

A 2006 case from the Pennsylvania superior court, Mee v. Safeco Ins. Co. of America, analyzes a similar question of whether an insured was entitled O&P when the insured repaired the damage himself. In that case, the insured owner was not a contractor, but the court still felt he should be able to recover O&P.

The court emphasized that the insured had paid a higher premium for replacement cost coverage, which entitled him to O&P when use of a general contractor would be reasonably likely, even if no contractor was used or no repairs made.

Here's a link to the article

And here is the article, courtesy of Claims Mag and Diana Reitz, CPCU
--------------------------------------------
Overhead and Profit
Spurring a slew of adjuster questions

By DIANA REITZ, CPCU

Many of the questions coming to FC&S deal with whether or not overhead and profit (O&P) should be paid on a loss when less than three trades are involved. Others deal with whether O&P should be deleted in its entirety from an actual cash value settlement under a replacement cost policy. Still others have different twists, but all of them focus on insurer guidelines for how O&P should be treated when adjusting claims.

For example, a Wisconsin subscriber phrases it this way:

I have studied case law until I am blue. This is a question about the present view of the courts regarding overhead and profit due a general contractor. Is a true GC entitled to O&P if more than three trades are involved? I have a number of adjuster scopes that include it in the homeowner’s scope of damages and I have many that do not include it in the same situation, maybe homes on the same street.

Another subscriber zeroed in on the question a bit differently:

To receive overhead and profit, must the homeowner hire only a CGC and not a CC? If the homeowner hires a contractor that only has a county license, is he entitled to overhead and profit?

And yet a third, from an adjuster with an independent adjusting company, added another spin on the question of overhead and profit, this time asking whether a general contractor who also was the owner should receive overhead and profit payments under a builder’s risk policy:

A fire loss occurred under a builder’s risk policy. The insured constructed the dwelling as a general contractor, but he also is the owner. Is the insured entitled to overhead and profit if he reconstructs the dwelling post loss?

Before discussing this issue, let’s take a moment to outline just what O&P entails. According to the glossary in the book, Insuring to Value, 2 nd Edition, which was written by MSB president Peter M. Wells, there are two types of overhead: general overhead and job-related overhead.

General overhead relates to a broad variety of costs typically involved in doing business, such as office staff, office rent, office supplies and equipment, sales, marketing and advertising costs, and finance charges. Job-related overhead refers to costs other than labor and material costs that are directly related to a specific project, such as building permits, fees and inspections, utility hook-up charges, construction drawings (blueprints), surveys, erosion control (silt fences, etc.), construction driveway, culvert or curb cut, interior cleaning of the building prior to occupancy, and site security.

Profit is defined by Mr. Wells as a positive return on investment. In building construction, remodeling, or reconstruction, it is the fee charged by a general contractor for construction services provided.

The FC&S editors generally have taken the stance that O&P is a part of replacement cost and, thus, should be included in the replacement cost calculation, which then is depreciated to an actual cash value amount.

Particularly in cases in which the insured owner is a contractor, we don’t believe it should be automatically subtracted in a settlement. In responding to the inquiry from the independent adjuster about a contractor who rebuilt his own building, we said:

It is our opinion that overhead and profit should be included in the replacement cost payment to a general contractor who rebuilds a structure he owns after it is destroyed by a covered cause of loss. After all, the contractor in such a situation loses the opportunity to earn overhead and profit on another job, which must be foregone in order to rebuild this structure.

A 2006 case from the Pennsylvania superior court, Mee v. Safeco Ins. Co. of America, analyzes a similar question of whether an insured was entitled O&P when the insured repaired the damage himself. In that case, the insured owner was not a contractor, but the court still felt he should be able to recover O&P.

The court emphasized that the insured had paid a higher premium for replacement cost coverage, which entitled him to O&P when use of a general contractor would be reasonably likely, even if no contractor was used or no repairs made.

The following class-action suit for breach of contract and bad faith involved a replacement cost policy covering the dwelling of James Mee . The policy defined actual cash value as “the cost of repairing the damage, less reasonable deduction for wear and tear, deterioration, and obsolescence.”

The insurer deducted 20 percent for O&P from its initial payment, and Mee subsequently presented a claim for this 20 percent. The insurer requested the name of the general contractor who would be doing the repairs, indicating that the information was needed as a basis for the payment. Mee sued, and the trial court granted summary judgment in favor of the insurer. Mee then appealed, arguing that general contractor O&P should be paid “automatically and unconditionally” whenever more than one construction trade would reasonably be required.

The Mee court referenced another case from the Pennsylvania Superior Court, Gilderman v. State Farm Insurance Co. As referenced in the Mee case, the court explained that the issue in Gilderman was “whether an insurer, which has agreed to pay repair or replacement costs less depreciation in advance of actual repair or replacement of a covered loss, may automatically withhold both depreciation and a flat 20 percent” for contract O&P in its advance payment.

The court said the answer to this question rested on whether use of a general contractor was “reasonably likely,” which was a question of fact for a jury to decide. The Gilderman court established an objective standard by which an insurer could determine, “on a case-by-case basis,” whether to pay O&P.

Using this logic, the Mee court said the operative issue was the reasonable likelihood of a general contract being used, not whether or not the homeowner did the work himself. As a practical matter, adjusters tell us that several software programs use the construction standard of three trades as a rule of thumb on the payment of O&P. But nowhere in any insurance policy have we ever seen these specific words.

The three-trades threshold is a reasonable construction standard, but we don’t think it can be used exclusively to decide whether O&P should be paid. The individual facts of a case may dictate otherwise, especially when an insured has paid additional premium for a replacement cost policy.

Diana Reitz, CPCU, is editorial director of Fire, Casualty & Surety Bulletins. She may be reached at dreitz@nuco.com