Farmers Sells a Policy that Is Far Worse then Its Competitors - Review of the Farmers "Next Generation" Homeowner's Policy, Part 3: Overhead and Profit

The title of this blog is a quote by Chip Merlin after we discussed some of the issues that have been popping up in my continued review of the Farmers “Next Gen” policy. During this review, I realized this policy is really the gift that keeps on giving—that is, if you are the carrier. Hidden throughout the policy are changes, some major, some more subtle, that make the policy extremely carrier friendly and, in my opinion, anti-consumer in order to pay less on claims.

One such change is the below clause that deals with the payment of overhead and profit:

e. General contractor fees and charges will only be included in the estimated reasonable replacement costs if it is reasonably likely that the services of a general contractor will be required to manage, supervise and coordinate the repairs. However, actual cash value settlements will not include estimated general contractor fees or charges for general contractor's services unless and until you actually incur and pay such fees and charges, unless the law of your state requires that such fees and charges be paid with the actual cash value settlement.

I see two major issues with this clause. First, and perhaps most obvious, is the language that makes the decision to pay overhead and profit subjective. While the traditional view is that overhead and profit will be paid if three or more trades are involved in the repair, this policy states that overhead and profit will only be paid “if it is reasonably likely that the services of a general contractor will be required to manage, supervise and coordinate the repairs” (emphasis added). The insurance carrier will be the one to determine if a general contractor is necessary regardless of the number of trades or complexity of the work to be performed. I can only imagine the fights this will cause.

The second major problem with this clause: overhead and profit is only paid once incurred by the insured. Making overhead and profit an incurred coverage item can put a huge burden on an insured that may not have the means to front the expense. Imagine a homeowner has a fire that destroys their home. The replacement cost of the home is $200,000 and after overhead and profit is added the total rebuild cost is then $240,000. However, the home is older and the insurance carrier depreciates the home by $50,000 making an actual cash value payment of $150,000. In that instance, Farmers would write a check for $150,000 for a $240,000 loss. The insured can’t make a claim for the recoverable depreciation or overhead and profit until those costs are incurred. The insured would have to front $90,000 to secure full indemnification under the policy.

Finally, it should be noted that the policy form this clause was taken from is the one used by Farmers in Pennsylvania. I wonder why this provision is even in the policy as it states that overhead and profit will only be paid when incurred, “unless the law of your state requires that such fees and charges be paid with the actual cash value settlement.” As my learned colleague, Larry Bache, wrote in October, 2012, Pennsylvania law requires overhead and profit to be paid as part of the actual cash value payment. However, after conversations with some folks working claims in Pennsylvania, that does not seem to be how the claims are being administered.

If you have been following this series, you may be noticing a trend, the policy seems to have a lot more words and a lot less coverage. Reading it, I feel like I am entering the Twilight Zone.

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Comments (6) Read through and enter the discussion with the form at the end
Michael Capilli - July 29, 2015 8:44 AM

Good information as always.

Funny how the name of this policy doesn't reflect just how crappy it really is. Most insurance consumers may be 'duped' into buying this because it maybe 'lower priced' and sold as an 'all risks' policy.

Paige - July 29, 2015 9:34 AM

Thanks for the rundown. Very interesting information.

Kevin Burpee - July 29, 2015 10:30 AM

Another issue with not paying O&P that we successfully argued against Farmers and other carriers is the fact that not all property owners for whatever reason would make repairs within the time frame of the one year "suit against us" provision. Lets say the insured decides to hire a GC 14 months after the claim was closed. They would, by admission of carriers, lose out on the O&P altogether.

Many property owners wait to make repairs for a host of reasons that are completely legitimate. The argument from the carrier is often that the insured would gain a "windfall" by obtaining O&P but never having to use it. Its a senseless argument because it is the carrier that actually obtains a windfall by not paying it when they are selling Replacement Cost Policies (charging additional premium) but paying as if it were a diminished form of an ACV policy.

David Skipton - September 8, 2015 1:32 PM

There are a few things to consider when dealing with this new policy. If your state has adopted the 165 lines of the NY policy as their statutory policy then the appraisal clause is irrelevant.

If your state has a statutory definition for actual cash value then their policy language means nothing.

If you state has weighed in the O&P issue then this is a moot point too.

We need to get the word out that this is a lousy policy so that we don't run into them very often.

Daina Dillabough - January 7, 2016 10:59 AM

Overhead & Profit is not a construction industry standard. It is important to realize that Xactimate and its poorer cousins are all constructed and marketed to the Insurance Industry, especially the insurers, and only coincidentally to a segment of the construction industry. Many contractors who work outside of the insurance repair market use other terms and other ways of providing for profit margins within their estimates.

Where an insured hires a contractor other than one who subscribes to Xactimate to work within the Insurance industry, the whole Xactimate vernacular is alien to that transaction. Typically, insurers will require a non-Xactimate bid or estimate be translated to Xactimate. This is because their claims staff are not trained or equipped to understand actual construction, just theoretical Xactimate constructs.

The Farmers policy in addressing "O&P" points out how intrusive and invasive the Insurance industry has become to the contractual relationship between the property owners and their chosen construction tradesperson.

Steve Patrick - May 21, 2016 10:44 PM

Why does the insurance carrier get to be "the one to determine if a general contractor is necessary regardless of the number of trades or complexity of the work to be performed?" The Insured is the one that has to perform the work of being their own GC if they elect not to hire one. Therefore, they should be the one that decides whether they want to do this additional work for free or not.

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