Overhead and Profit Insurance Claim Laws and Regulations

In the United States, the National Association of Insurance Commissioners (NAIC) regulates insurance companies, including those offering overhead and profit insurance.

The NAIC model law requires insurance companies to clearly disclose the terms and conditions of overhead and profit insurance policies to policyholders.

Policyholders must also be informed that the insurance company's overhead and profit are typically calculated as a percentage of the total premium.

The NAIC model law also specifies that insurance companies must provide a detailed breakdown of their overhead and profit calculations to policyholders upon request.

The Three Trade Rule is a crucial concept in determining when overhead and profit (O&P) should be paid in a property damage claim. This rule states that if a project requires professionals from at least three different trades, O&P can be included to cover the extra time and red tape needed to complete the work.

A general contractor (GC) is typically needed to coordinate the tradesmen, schedule the work, and manage the various repairs needed. This can include professionals such as electricians, plumbers, and HVAC specialists.

If more than three trades are involved in the repair process, insurance carriers usually presume that a general contractor would be necessary to oversee the repair process. This can result in O&P payments, which can start at 20 percent of the project costs.

In Texas courts, the issue of overhead and profit has been addressed in the case of Ghoman v. New Hampshire Insurance Company. The court concluded that overhead and profit should be included in both the replacement cost and actual cash value amounts.

The court also stated that the replacement costs should include any cost that an insured is "reasonably likely to incur" in repairing or replacing a covered loss. This can include overhead and profit, sales tax, and other expenses.

Here's a summary of the key points:

In Pennsylvania, a class action was filed in 2017 alleging that insurers are trying to exclude GCOP from property damage claim payments made on an ACV basis.

The case, Konrad Kurach v. Truck Ins. Exch., was brought before the Court of Common Pleas of Philadelphia County, Pennsylvania. The named plaintiffs had replacement cost insurance policies and the insureds had not yet completed construction repairs at the time they received their ACV payments.

The carrier argued that it was not responsible for including GCOP in their ACV payments because these payments were made on an ACV basis and the policy terms specifically excluded GCOP payments for contractors when payments were made on an ACV basis.

The trial court disagreed with the carrier, stating that insurance companies are required in Pennsylvania to include general contractor overhead and profit in actual cash value payments for losses where repairs would be reasonably likely to require a general contractor.

On July 1, 2019, the Pennsylvania Supreme Court agreed to hear an appeal on this issue in the Kurach case.

The Three Trade Rule is a crucial concept in overhead and profit insurance claims. This rule of thumb is used by insurance adjusters to determine when a general contractor is required for a construction project or repair job.

A general contractor is typically needed for more complex projects, not simple repairs. The Three Trade Rule states that a claim can be eligible for O&P payments if professionals from at least three different trades are required to complete the work.

A "trade" refers to skilled professionals, typically those who hold special licensing or certifications to carry out complicated or riskier labor. Electricians, plumbers, and HVAC professionals may all qualify as tradespeople.

The Three Trade Rule is not a hard and fast law, but rather a guideline used by insurance companies. However, it can have a significant impact on the outcome of your claim.

Here are some key points to keep in mind:

If O&P is warranted for a property damage claim, these payments can start at 20 percent of the project costs, with payments usually going to the GCs who are coordinating and managing the work.

Insurance claim adjustment issues can be a real headache, especially when it comes to determining whether overhead and profit (O&P) payments are warranted. The Three Trade Rule is a crucial factor in this decision.

A general contractor (GC) is usually required for complex projects, and O&P may be included to cover the extra time and red tape needed to complete the work. This is because professionals from at least three different trades are required to complete the work, making a GC necessary to coordinate the tradesmen, schedule the work, and manage the various repairs.

A GC would typically be responsible for obtaining necessary permits or verifying zoning requirements associated with the work needed. Trades refer to skilled professionals who hold special licensing or certifications to carry out complicated or riskier labor, such as electricians, plumbers, and HVAC professionals.

O&P payments can start at 20 percent of the project costs, with payments usually going to the GCs who are coordinating and managing the work. However, you shouldn't expect insurance companies to act ethically or above board with your claim.

You can push back against insurance companies' bogus applications of the Three Trade Rule with the help of an attorney. They can assist you in positioning your claim for full, fair compensation.

Some common questions that can arise during the adjustment of an insurance claim include whether the required construction work will need the type of supervision and coordination that warrants payment of overhead and profit.