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Posted By johnpostava on 23 Nov 2009 09:06 AM
Let this adjuster/software guy chime in (since I have been asked by many attornies on this subject). I have done research and can not find the "Three Trade Rule" (TTR) printed anywhere in insurance-related references. The TTR is just a rule-of-thumb but still needs to be considered on every loss. At the least it should be mentioned (sometimes in detail) in every narrative and/or short form report (why it was included or not included in the estimate). I have paid OP on one-trade losses if the NI (named insured) is too old to adequatly manage the repair and if it is commecial loss where additional supervision was needed. Here's a question for the PA's out there...If an NI has a multi-trade loss and is managing his or her own repairs, how much, if any, should the NI be allowed for "overhead" to manage the job (call the vendors, be there for their appointments, examine their progress, etc.)? Of course, no NI can "Profit" from an insurance claim but what about their efforts and time bringing the risk back to pre-loss condition without the use of a general contractor?

As a PA I have a rule of thumb that if the NI paid a premium for replacement cost in the event of a loss, then it would be a fraud on the insured to deny him the entitlements that he paid EXTRA  permiums for.  It is already accepted, by the contract terms, that he can be better off with new for old, which is a profit in every sense of the word.  Wait a minute.... that is a contractual condition and my rule of thumb would not be needed.  Where in any known legally drafted contract can a RULE OF THUMB be considered by the courts.  I look forward to the time when either Simsol, Xmate, Msb or Powerclaim claim will have a line item for RULE OF THUMBS, considering that the plural is effective as there may be more than one RULE OF THUMB.  Suppose the NI has decided tht he did not wish to repair his home and in the alternative discount the price by the cost of making replacement cost of repairs.  He paid a premium to get full cost of repairs and has incurred the loss when he discounted the price to the new purchaser.  If the industry is willing to acceept RULES OF THUMBS please advise as I would like to register a few that would serve my interest outside the contract terms, but only with the understanding and condition that they will never be identfiable as to where they came from.
 

William S Cook

Public Adjuster

A rule of thumb is a principal with broad application that is not intended to be strictly accurate or reliable for every situation. It is an easily learned and easily applied procedure for approximately calculating or recalling some value, or for making some determination. This is our interpretation of the rule of thumb.

If you look up the rule of thumb, as suggested, you're going to find many applications and purposes to the term in many types of society and countries. So, there is no set rule or law that determines what the rule of thumb is.

I am playing catch up here, and was reading this post as a short break between handling a couple of complex claims. So I may have missed something along the way. With that disclaimer, however, I find myself agreeing most with Leland - especially his first post on this thread.

Back in the mafia areas of Pennsylvania an adage arose that said, "There are no laws; only rules." Actually, the rules became a sort of unwritten law. The same thing has occurred with the three trade rule. If I were working for one of the big companies, they would be pounding the rule into me as if it were a law. However, at this point in time, I don't work for one of the big companies. That means my supervisor and I make the decision when to add overhead and profit. And my rule is: Does it make sense to add overhead and profit to this job? Except where the courts have ruled otherwise, overhead and profit is only owed if overhead and profit is incurred. This is a corollary of the principal of indemnity. If the three trades involved are HVAC, roofing, and fencing - and the insured calls three separate contractors - overhead and profit is not owed. Also, there may be twelve trades, but the insured may call a separate electrician. Then overhead and profit would be owed on most of the job, but not on the electrical work. If the insured calls out a water remediation company and then later calls a general contractor to do the repairs, O&P would not be owed on the water remediation service. But if the insured calls a general contractor first, and the general contractor calls the water remediation folks, then O&P may apply to the entire job, including the water remediation.

What we need to keep in mind is that we have a legal standing of one with "superior knowledge" (I can hear the mocking laughter even as I write that phrase). The insured is not generally expected to know that he or she should call a single contractor on one job but a general contractor on another job. This should be part of the explanation given to the insured by the adjuster. If the only damage is to a roof, the adjuster should be explaining to the insured that he or she should call a roofing contractor rather than a general contractor. If this is not explained to the insured, and the insured throws open his yellow pages to Contractors and picks one at random, picking a general contractor who then calls his roofing subcontractor to come and do the work, then what court is going to say the insured should be stuck paying the Overhead and Profit? A good adjuster is going to explain to the insured how to proceed after the inspection. This should take about an extra minute before we run on to the next inspection. This type of communication is what is expected of us, and this is part of why they "pay us the big bucks". And it will save a multitude of headaches for the staff adjuster left to deal with the clean up of the cat event. The insured is not expected, under the law, to be an expert in construction and insurance. We are supposed to be, and we are - to varying degrees. When the claim goes to court there is a pre-supposition that we have this "superior knowledge", so we should be using it in the field to assist the insured in getting repairs done without incurring additional costs beyond their deductible.

If anyone has any information on the recent settlement in Oregon involving Nationwide and concerning O&P not paid by Nationwide, I would be interested in finding out more about that case. What I know is that Nationwide did not pay O&P over a course of years on certain claims. A class action suit was brought which Nationwide settled out of court by agreeing to pay 20% more on the involved claims. I don't know more than that. Perhaps someone here does.

Seems I did it again.  I set out to post a couple lines and ended up writing a small book.  Sorry, all.

Well it appears we have a consensus of thoughts.  We all have differing opinons.   Who will be the first expert to admit that they opine that the RULE OF THUMB has a place in a contract of insurance. I need your participation  in a court case that I am currently involved in. I looked in my policy definitions, nothing there in any of my sample policies about three trades or ruls of thumb.  I then looked in my two  Blacks Law dictionary, nothing there.  I looked on the internet at google and wickipidia,  only ancient ancient history about beating your wife or distance from the coast on a chart.  None of the sources had any mention of rule of thumb or three trade rule applicable to a contract of insurance or reducing the entitlements in a contract.  As of this point in time the thread had almost 1400 eyeballs looks and not one opinion among all of the professionals that participate in this forum to provide any validity to RULES OF THUMB as it may LEGITIMATLY apply to  a claim payment.  Mr. Postava says it should be noted in an estimate as to why O&P was addressed under the three trade rule.  I think that is an excellent idea rather than orally explaining to an insured that it is just kind of an industry practice that is applied when the moon is in the seventh house or for whatever reason can be conjured at the time, based on an individuals RULE OF THUMB interpretation.

William S Cook

Florida PA

PS

Thanks Roy for allowing me represent the dark side and  address some issues on some occsions

I have posted entries on a few threads about the O&P subject with a lot of detail, explaining that there have been multiple suits and rulings around the U.S. that say it is owed to the insured whether or not they hire a contractor, do the work themselves, or even don't do the repairs.  Here is the first quote that I have posted, although this is just part of a longer article.  The link takes you to the Merlin Law Group web site where Chip Merlin posted the article, and at the end allows it to be sent to others, so I assume it is ok to post here.

Hopefully this will clear up the misunderstanding where some have expressed the opinion that the homeowner is not entitled to overhead and profit, although I am sure some will not agree with the various court descisions.  As to the question about the Nationwide lawsuit in Oregon, the lawsuit was class action nationwide against nationwide, so far as I know.  I know that Texas, Ark, and Ok were included because I received notfication of the lawsuit for properties I own in Texas and Oklahoma although I declined to be part of the class since I had never had a claim other than for hail with Nationwide. The following article, I think, clearly states the position that the Texas Dept. of Ins. takes in this matter, as do several other states based on rulings that I have studied.

http://www.propertyinsurancecoverag...attention/

"On June 12, 1998, the Texas Department of Insurance issued Bulletin #B-004598, indicating that the deduction of a prospective contractor’s overhead and profit and sales tax, in determining the actual cash value under a replacement cost policy, is improper. The Department noted that the wrongful interpretation of language in the Texas Standard Homeowner’s Policy generated two class action lawsuits and various inquiries to the Department’s position on the matter.

In explaining its reasoning, the Department noted that “there is no situation in which the deduction from replacement cost of depreciation and contractor’s overhead and profit and/or sales tax on materials will be the correct measure of the insured’s loss.”

Further, the Department noted that insurance companies are not allowed to charge premiums in excess of the risk to which they apply. Thus, under a replacement cost policy, the value of the contractor’s overhead and profit, as well as sales tax on building materials, are included in the premium, and if the insurer receives a premium on insurable values which loss may never be paid, “the insurer reaps an illegal windfall.”

Finally, the Department dispensed with the common argument that contractor’s overhead and profit, as well as sales tax on building materials, should be excluded from Actual Cash Value settlements because the insured has not incurred these expenses as illogical:

"Using this logic, an insured who opts not to repair or replace damaged property would not incur any of the expenses necessary to repair or replace the damaged property, including the costs of building materials, and would collect nothing under an actual cash value loss settlement. This result would be contrary to the purposes of the subject insurance policy."

In 2009, this rule still applies, and insurers that violate it can expect to be sued. "

P.S.  I hope my spelling is correct - I have never been able to get spell check to work on this web site, even after trying the suggestion made earlier.  I am using edit at this time to add this P.S. line and still can not get spell check to run, even if I highlight the content. Anyone have any other suggestions?

Here is a link to the web site for the Burgess class action law suit in Oklahoma against Farmers for failure to pay o&p to home owners from 1994 to 2009 with details of the settlement agreement.

http://www.burgess-class.com/FAQs.aspx

This link further explains the lawsuit against Nationwide. The article references an identical lawsuit originating in Penn. against them, and the fighting going on in the Arkansas court prior to the settlement being reached.

http://www.setexasrecord.com/news/2...nationwide

Here is a recent article about TWIA acknowledging the Texas rule stated explained in the prior post, although they are acused of voilating the rule.  Also included are updates on several  other disagreements and lawsuits. 

http://www.chron.com/disp/story.mpl...11938.html

Following is a link to an appeals court ruling in AZ on the exact same issue in favor of the insured.

http://www.lang-baker.com/publications/constructionadvisor/contractorfees.htm

The list goes on but I will stop with these. This should create more discussion.

can not get spell check to run

I have been using a free spellchecker for 2 years from http://www.iespell.com and it works very well for forums, anything you type in a web environment.  It simply puts a spell check icon on the tool bar (I am using Internet Explorer).

For what it's worth, I agree with you on the issue of "ignore who is doing the work, focus on the scope of repair in terms of deciding O&P or not".  Actually my opinion is worthless, but 3 very large carriers I do work for have an opinion - and it's their sandbox.

I go to thinking that I should clarify one issue pertaining to O&P for those who don't know.  The payment of profit can be excluded within the policy then these rulings would not apply.  One example is builder's risk policies. I have adjusted some that exclude profit from a property damage claim and it makes sense.  I believe the thinking is that the builder will make his profit when the house is sold but not when he has to re-do construction to fix the insured damage.  Including overhead depends on the circumstances of each case and the specific terms of the coverage that can vary from one customer to another.

Measurable unit prices should have all the cost for a merchant to make a profit and stay in business. Ever item for sale has an asking price and a selling price. Many times they are not the same. If insurance companies use estimating programs to have "a unit price" for an auto repair job and a price for a dwelling repair job the public should not have any problems shopping the "estimate" around for the bottom line price or the discount off the bottom line price.Start the process of an insurance claim at the "fair price" in the data base and not pay more or less to the public. The true principle of INDEMNITY will come back to the insured who does their own shopping for what ever reasons.(get what you pay for)

The real adjuster then has to allow for some legetimate expense on the bottom of the estimate, such as special order, travel time, overtime, grade of workmanship etc.

This would stop these lawsuits and out cry  about O & P which is driven by greed from the insureds, PA's, Lawyers and also the IA's on Fee bills who make 20% more on each file.

** Do you old timers remember the problems we had with roofers, who stated on ever estimate that we missed the roof measurements before we started drawing a diagram and making it a part of the file, thanks to the leader State Farm.

Ray,

I apologize in advance but I have to respectfully disagree with you on your last posting, although it is a possibility I am misunderstanding you, as that has happened before.  I don't consider it greed at all to want to receive enough to compensate me as a contractor or as a homeowner for the total cost to do a renovation.  I have been a renovation contractor since 1975 (and was contracting for several years before getting into insurance renovation).  It is much more difficult to make a profit on an insurance claim job than it is to build an addition to a house for someone.  There is very little, and many times no profit in the line items when a subcontractor is used to do the job. The overhead does not cover anything other than very basic business costs such as office, truck, phone, and similar related expenses.  Workers comp is so high that in the future I will probably have to add a line item in the estimate to cover it and the liability insurance. Both are directly proportional to the labor paid out except when a sub carries his own workers comp, which is almost never, and the liability which is carried by the trade subs (elec, a/c, plumbing) but not by the drywall and trim subs.  Some painting subs carry liability, some don't.There have been times when I could get 20% for overhead, but most carriers won't agree to it.

I believe that these court rulings, at least for the most part, are correct.  There is no reason why the homeowner should lose money if he fails to do the repairs then sells his house as is which is what happens as I have detailed on other threads on this subject.  As to letting competition drive the prices, I don't see how that can work.  Most contractors in residential renovation don't do competitive bidding because it won't work.  If I get called first and get an agreement to do the job if the settlement is sufficient for me to do the job, another contract is not going to give a bid if mine is agreed to by the homeowner and adjuster.  Why would they?  The insurance company is only going to pay what the first contractor bids if his price is right.  If an agreement can't be reached, then the insured might be told to find another contractor, otherwise the first contractor gets the job.  I don't think any contractor will spend the time to work up a bid for the insurance company knowing that one has already been agreed to. I don't see that this has anything to do with greed.

I have seen a couple of court rulings that went further into detail than these, stating that a homeowner is as much entitled to income as any contractor would be when he does the work. No one can micromanage the claim and determine what the homeowners occupation is and what his normal income is to say that he is not entitled to some of the claim funds just because he is the insured. Also, the policy does not define what the overhead is to cover, and a homeowner certainly has overhead as was explained in one of the rulings that I posted a link to.  I Think the Texas regulation and rulings on this issue are quite clear too, so I don't understand why some of the other adjusters believe otherwise.  Again, maybe I am misunderstand you and a few other adjusters.