Houston Chronicle reporter, Purva Patel, filed an article, "They Want ‘Profits’ of Ike," noting that Hurricane Ike policyholders who have wrongfully been denied payments for expected costs of general contractor overhead and profit are bringing their actions in class action lawsuits. Our law firm has filed some of these cases with Javier Delgado taking the lead. Javier was noted in the article:
"Javier Delgado, the attorney spearheading the lawsuits, said many homeowners who don’t hire general contractors for their repair jobs don’t realize they may be entitled to overhead and profit payments.
“Oftentimes the insurer is leaving it off the estimates completely,” he said, adding that for some homeowners the money can make the difference between making repairs or letting damage deteriorate.
Manuel Quezada, lead plaintiff in the lawsuit against Farmers, said an independent adjuster estimated Ike caused $12,500 in damage to his Sharpstown home.
Farmers made three estimates and, after accounting for a $5,800 deductible, sent Quezada $915 in advance with $3,000 due after repairs were completed.
The advance check wasn’t enough to buy the materials, Quezada said, let alone pay for the skilled roofer, fencing contractor and drywall installer needed to make the repairs.
“I had to fix it myself,” said Quezada, who patched up what he could.
But because he couldn’t make full repairs, he said, he couldn’t recover the additional $3,000.
And because he couldn’t prove he made adequate repairs, Farmers dropped its coverage of the house.
“It becomes a self-fulfilling prophecy,” said Delgado, who is representing Quezada in the lawsuit against Farmers. “They don’t give him enough to make the repairs, and then they stop insuring him for not making repairs.”
Quezada has since had his roof repaired by a contractor that agreed to await payment from potential proceeds from the lawsuit.
Because Quezada needed to hire three specialists, he was entitled to at least $1,600 in overhead and profits if he acted as his own general contractor, Delgado said, based even on conservative repair estimates."
For those interested in this coverage topic, I have presented seminars and written a paper, "Withholding Overhead and Profit is Wrong if Insurance Companies are Trying to Act Right," for your study.
I noted this in my 2002 paper:
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.