Overhead and Profit: Its Place in a Property Insurance Claim

As the Karl court reasoned, the broad evidence rule is “fatal to the position that, as a matter of law, general contractor’s overhead and profit must always be included as part of the ACV in each instance where a general contractor could be necessary to actually complete the repairs.”

State Insurance Commissioner Rulings
Quite impressively, the Texas Department of Insurance took action and squarely addressed the propriety of State Farm deducting contractor’s overhead and profit from replacement cost when calculating ACV.

In a bulletin issued June 12, 1998, the Commissioner of Insurance strongly articulated the position of the Texas Department of Insurance relative to such practice: “The deduction of prospective contractors’ overhead and profit and sales tax in determining the actual cash value under a replacement cost policy is improper, is not a reasonable interpretation of the policy language, and is unfair to insureds.”

The Colorado Division of Insurance lent support to that position when it fired off a missive declaring its own stance on the issue. In a June 4, 1998, letter to a State Farm representative, the Colorado Division of Insurance wrote: “Based on the provisions in the policy, and the legal definitions of ‘replacement cost,’ ‘actual cash value,’ and ‘depreciation’ there do not appear to be grounds for State Farm to have refused to pay the ‘overhead and profit’ which is part of the replacement cost of the property. The ‘actual cash value’ of the property allows for a deduction for ‘depreciation,’ but under no legal

definition, nor policy definition, is there a provision for a separate deduction for overhead and profit.”

Industry Custom and Practice
Textbooks commonly used in the insurance industry include contractor overhead and profit as a component of repair or replacement cost. Property Loss Adjusting is a textbook for property claims adjusters published by the Insurance Institute of America for use in its industry-wide insurance designation and certification programs. It lists the following elements as comprising repair or replacement cost:

  • materials
  • labor and employers’ burden
  • tools and equipment
  • overhead and profit
  • miscellaneous direct costs such as permits and taxes

Widely accepted construction estimating publications like Marshall & Swift/Boeckh, RS Means, and Sweets that are used in the insurance industry in estimating the replacement cost of commercial buildings and residential dwellings, define replacement cost to include labor, materials, and contractor’s overhead and profit.

To add even further validation, the Property Loss Research Bureau (PLRB), a recognized resource used by insurers in the interpretation of property insurance policy provisions, has taken the position that “contractor’s overhead and profit are included in ACV, because they are part of replacement cost.” The PLRB concludes that “any estimate of actual cash value should include overhead and profit.”

Other industry groups are taking similar positions. The Fire, Casualty & Surety Bulletins