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Last Post 11/25/2009 1:35 AM by  rickhans
Three Trade Rule for O&P
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Author Messages

11/23/2009 2:10 PM
And, like always, case law on things like this varies from state to state. Not to mention flood claims, which is Federal....

11/23/2009 2:38 PM
When an adjuster applies good faith and analyzes whether overhead and profit is applicable, the adjuster is usually relying on his or her experience and knowledge of the construction world.

By comparison, when carriers have a coverage question they often turn to an outside expert, their attorney, and get a written opinion. By using a third party opinion, its not nearly as likely to incur a bad faith claim.

It's generally not bad faith to rely on experts.

Adjusters can follow a similar procedure when analyzing whether to apply overhead and profit. It may be appropriate to send the question to one or more contractors and ask them if they think the O&P is needed. If they say no, and put in in writing, the adjuster can, in good faith, not include the O & P.

Imagine the scenario alluded to above where the contractor finds a tiny water stain on the drywall to try and add 10 & 10 to a $200,000.00 roof repair.

If the adjuster verifies with one or more other roofers that an extra $40,000.00 of O& P is not justified, it will be much harder for the insured to allege otherwise or successfully claim bad faith.

If the adjuster just "knows" that the extra $40,000.00 is unjustified, and simply says no without documentation from a third party, he may be 100% dead on accurate but he will have a harder time defending himself down the road. It doesn't always matter what the adjuster "knows" but what he can "prove" or "document".

The flip side of the coin of course is if the third party roofer comes back and says the $40,000.00 is fair....

11/23/2009 2:38 PM

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


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

William S Cook Public Adjuster/Umpire/Appraiser

11/23/2009 2:58 PM
One of these days, we're going to be on opposite sides of the same claim, Sir Cook. We'll surely have fun, then. Won't we? I value your participation here.

"With great power comes great responsibility." (Stanley Martin Lieber, Amazing Fantasy # 15 August 1962)

11/23/2009 3:17 PM
Mr. Cook, I love your contributions to this community, but like I was implying above, a "rule of thumb" or any other usual or customary practice in a particualr industry could be the basis for a fair settlement, even though the wording doesn't appear in any policy.

For example, union painters are often taught that all intersecting surfaces must be caulked, prior to painting. This "trade practice", like a rule of thumb, is not spelled out in any policy I have ever seen. Are you suggesting that insurance companies should not pay for caulking anymore? Your argument cuts both ways.

What exactly is "workmanlike manner"? - that's a popular term from case law.

I think the issue of "rules of thumb" is not whether it's OK to use them but when to use them and who to ask.

As always the true value of the loss is the reasonable price a licensed contractor would charge, in an arm's length transaction, to restore the property to the pre loss condition in a workmanlike manner, using legal employees, while carrying liability insurance etc. If that honest contractor (and/or similar contractors) says the job needs O&P then it probably does. If he says it doesn't, it probably doesn't.

Obviously there are always going to be differences of opinion but if the going market pricing for $200,000.00 roofs with $500.00 ceiling stains is no O&P then O&P is not owed. If the market pricing is O&P on that kind of loss, then O&P is owed.

We can talk theory and software etc all day long, but it's real hard for me to imagine some roofers sitting around at the restaurant insisting that an insurance company was unfair for not paying an extra $40,000.00 for the example I gave.

And who knows, I wouldn't be surprised if the experienced roofers had a rule of thumb: "For any interior work under $1000.00 I don't ask for 10 & 10".

If, hypothetically, two or more roofers agreed with that rule of thumb I would be inclined to make my payment recommendation agree, and I wouldn't feel awkward quoting them in my report or even my letter to an esteemed Public Adjuster such as yourself.

And of course, since it is a free country (still) you can try to find a roofer that will say the opposite.
Advanced Member
Advanced Member

11/23/2009 3:45 PM

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.



"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?


Advanced Member
Advanced Member

11/23/2009 4:45 PM

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.


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.

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.

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

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


11/23/2009 5:17 PM
can not get spell check to run

I have been using a free spellchecker for 2 years from 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.

Bob Harvey
Advanced Member
Advanced Member

11/23/2009 7:53 PM

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.

Ray Hall

11/24/2009 1:45 PM

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.



Advanced Member
Advanced Member

11/25/2009 1:35 AM


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.


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