The Colorado Department of Insurance has proposed eliminating one of its long-standing bulletins requiring insurance companies to pay contractor overhead and profit rather than deduct the amount until incurred. Such an elimination is obviously against policyholder interests and is the result of insurance industry lobbyists making inroads with Colorado insurance regulators who are supposed to be guardians of the public interest.

I filed a comment last week against eliminating the proposal. In part, I stated:

The proposed withdrawal of the longstanding Bulletin should not happen. The proposal to withdraw the bulletin is against Colorado policyholders’ interests, it is anti-consumer, creates incentives for insurance companies to wrongfully market their Replacement Cost Product while not paying replacement cost and incentivizes insurers to underpay and delay claims. We include as attachments a letter from Merlin Law Group, three articles on the topic and two other State insurance commissioner Bulletins which support keeping the Bulletin in place.

However, a simple example of why removing the Bulletin is against logic and public policy is the following:

A retired pilot saves his money for a retirement home and builds it on the side of a hill on land he has long owned in Colorado Springs. The home is built for a cost of $750,000. He buys Replacement Cost Insurance for $750,000. Two days after the construction is complete, a jet which ran out of fuel crashes into the home, destroys it and a guest of his in the house died. The retired pilot makes a claim for $750,000—the cost to rebuild the structure. The insurance company agrees but says that the Colorado Division of Insurance has removed a bulletin requiring it to pay the contractor’s overhead and profit until he rebuilds the house. So, they deduct the approximate 20% amount per the estimate and pay him $600,000 as the Replacement Cost less the contractor’s overhead and profit. To add insult to injury, the retired pilot, decides he never wants to rebuild at that site because of the emotional incident. In summary, he just paid $750,000 for the house, bought insurance for $750,000 and the Colorado Division of Insurance is allowing the insurance company to pay an amount less than the agreed Replacement Cost.

My letter is attached along with other state bulletins from Florida and Texas (B-0045-98 & B-0068-08) which prohibit such a deduction, an article written by Ed Eshoo and a paper I have written on the topic.

The Colorado Department of Insurance has extended the filing of public comments until February 15, and you can file a comment through the following link:

Quote For The Day

Policy is no longer being written by politicians accountable to the American public. Instead, policies concerning the defense budget, deregulation, health care, public transportation, job training programs, and a host of other crucial areas are now largely written by lobbyists who represent mega corporations.
—Henry Giroux

  • Jim Johnson

    The estimate to rebuild should all of the costs to do so, including overhead and profit (O & P) and then reasonable amount can be held back and payment be made according to the policy as the actual cash value of the property. If the state has a valued policy law, then the full payment of the loss, including overhead and profit should be paid if the loss is considered a total loss.

    Where I have seen the worst abuse of overhead and profit and it goes on in many states, is smaller losses the ones that normally don’t involvement with PA’s and attorneys. Some are worse than others (aka Farmers), but the adjusters are trained to use the excuse of the loss not being complex enough to warrant O& P, for these smaller repairs. The policyholder is usually unaware and not able to solicit help due to the size of the loss in many of these cases.

    Most of the general contractors that I know, look at O & P on small losses to often be needed even more, due to the logistics of making small loss repairs, which often involve several trades and multiple trips to the repair location.

    • Jim,

      I appreciate your comment.

      There is a slightly different battle regarding Overhead and Profit being owed at all.
      I think that is what you are referring to and that is a slightly different issue and we have discussed that topic a lot.

      However, where there is agreed contractor overhead and profit that is part of the estimate, some insurers are now trying to get away with not even including that in the calculation of Actual Cash Value and rguing to hold back that amount until the Replacement is done.

      • Jim Johnson

        I apologize Chip , I guess I got off direction, but I did understand what the new attempt is in Colorado, which I think is a dangerous precedent if it becomes law.

        Since the early 1980’s I have either been writing estimates as a general contractor and later as a large loss staff adjuster, now, back as a GC again. In my early days in the property claim industry, the trend was to only pay 10% representing both overhead and profit and even then, they didn’t want to pay it on carpeting and roofing. However, for a while in Oklahoma after the insurance industry lost or settled several bad faith suits on O & P, they loosened up the pocket book, but now the trend seems to be figuring out how to not pay it again, such as the attempt in Colorado!

        I sincerely appreciate you and for you allowing me to post occasionally on your forum. I will try to stick more closely to the content of the forum!

        • Jim,

          I was aware of the class action lawsuits in Oklahoma. Millions were paid out and the practice stopped.

          I agree with your observation that “the trend seems to be figuring out how to not pay it again.”

  • bitdough

    I thoroughly enjoyed your entertaining example of the emotionally affected pilot who lost not only his home and a house guest. I would have added his co worker was piloting the crashed plane as well as the passengers consisting of family members etc. But we are all allowed creative license to emphasize our position. I agree this is anti consumer. But as an industry we have to expect some push back in response to requests for O and P on non complicated, trivial, straight forward roofing replacement claims. My position is can we show some self restraint, and self governing as an industry. I routinely am requested as an Umpire in Appraisal.
    I find it comical that contractors acting in the capacity of Appraiser ask for O and P when clearly one roofing contractor ( without sub contracting) will be utilized in completion of the job. There has been an increase in these requests after listening to evangelistic motivational speakers at insurance conferences spreading their ideology of O and P on every job regardless of complexity. It is neither realistic nor applicable in every situation. The danger in this is the resulting lobbying efforts to have O and P paid as incurred. Surely every action has a reaction. My contention is self restraint and judiciously asking for O and P when warranted is the correct course of action. And rebuking, recognizing, and resisting the temptation of greed and false authority figures in the industry would be the first step. I would be happy to lend my experience in a realistic conference of insurance professionals. I suggest Merlin sponsor a conference of realistic, real world application of insurance principles with integrity. After attending a few of the aforementioned sponsored motivational conferences I clearly see the need for a legitimate insurance conference. A conference that I could be proud to present at as well as promote attendance at. Until then I will continue to do what I can within my sphere of influence, follow my conscience, attempt to redefine what being sucessful and sustainable is in the insurance replacement industry truly means. I encourage contractors, public adjusters, and policy holders to do the same.

    N. M.
    Property Claims Loss

  • Ross Auslander

    If the insurance company intended not to calculate O&P in an ACV calculation, shouldn’t they define that in the insurance policy? I’m all for reasonableness and don’t necessarily agree that a single trade repair (roofing) should include O&P in a claim calculation BUT some of those costs help offset the lowball unit pricing the insurance companies calculate in Exactimate or other insurance company pro estimating program. Also, in the roofing example (and we don’t handle roofing claims because they are reasonably linear – you either have hail damage or your don’t) there can be multiple trades for gutters, siding, interior damages, etc. which could necessitate a general or project manager to organize or manage all. Back to the definition though, if the policy defined the carriers intent not to cover O&P on an ACV basis then an educated consumer can decide to insure with company A (with limitations) or company B (without limitations). Thanks Merlin for all your efforts for insureds and for all your published insights for the rest of us.

    • Kyle Larson

      The problem is that, without the existing bulletin, insurers in Colorado can determine initially that O&P is warranted, include it as PWI, and then once the repairs are complete, depending on who does work, or how much of the work actually got done, decide that O&P was actually not warranted and remove it from the claim altogether. We see them try to do just that, now, and the bulletin is the only reason they do not get away with it already. That scenario creates a nightmare for any contractors, PA’s or others who are working on the claim. Not to mention how it gives insurers permission to totally screw insureds who decide to act as their own GC. Either O&P is warranted, or it is not, insurers should not have the ability to remove O&P after some, or all of the work is complete.

      • Kyle,

        You raise a point that was made at the Windstorm Conference today in a roofing workshop.

        The longer the insurance company does not pay on an item, the more often the insurance company changes its decision and then disagrees to pay what it previously said it would pay.

        Thanks for the comment.

  • Kurt Smith

    The consumer pays premium based on a replacement cost which includes the overhead and profit, so since the benefit is paid for the benefit should be given on every claim irregardless of any other factors. If O&P was an additional coverage that was not included in the replacement cost amount it would require an endorsement or be defined in the policy like other additional coverages and exclusions are already. If a pipe freezes and breaks in an unfinished empty basement and the only damage is the pipe and only a plumber is required to do the repair the insurance should pay O&P because the insured paid for that benefit. The insured has to call a plumber to get the work done. This takes the insured’s time and effort that without the loss they would not have to spend that time and effort. They should be compensated for this and on a replacement cost policy they paid premium for this benefit.

    • Kurt,

      Thanks for the comment.

      I had not thought of the issue the way you stated it, but you are right.

      Policyholders should get what they pay for!

  • Edward Fako

    Maybe I am misinformed, but I have seen copies of Underwriting Calculations such as Verisk360 and also the Farmers Calculation Sheet posted on your Blog Chip, showing the OH&P in the Farmers Document charged for and included a 25% amount attributable for OH&P.

    Wouldn’t all of the Insurers definitely be gaining an Illegal Financial Windfall by not paying for specifically what they have been charging for? It seems illusory to me, that on the Underwriting side, it is a justifiable fee, yet on the Claims Handling side, their training now switched from the feigned 3-Trade Requirement, to now one of Complexity, which Roofing never seems to qualify for, except in Appraisals.

    • Ed,
      Thanks for your comment.

      The answer to your question is “yes.” The insurers charge a premium for a replacement cost. But, they are trying to change the “replacement policy” into an “Actual Cash Value with the possibility of Replacement Cost Benefits” product.

  • rogerpoe

    Regarding some Insurers/Adjusters Post-underwriting “rules” – Many insurance adjusters irrationally segregate roofing components costs from general contractor based replacement cost of structures, and need to adjust their Insurer trained thinking accordingly. Otherwise – They help Insurers reap an Illegal Windfall that the Texas Department of Insurance Bulletin B-0045-98 plainly describes.

    When exactly (inside or outside the premium underwriting process) does calculating the replacement costs of a structure Begin with roofing contractors aggregate business overhead costs, and a profit factor?

    Answer: Never.

    Why? Because the overall daily placement and replacement dynamics/costs of structures intrinsically “anticipate” general [building] contractors aggregate business overhead costs, and a profit factor, towards ALL installed components costs of a structure. Roof components, by any reasonable mind, are included.

    P.S. If you were a general contractor, how many structures would you build/replace Without general overhead and profit costs being calculated towards carpeting, fencing, or roofing components?

    As long as the financial [underwriting] baseline is Not financially corrupted by post-underwriting market hoaxes and irrational gaslighting techniques, inherently equitable GC O+P financial loss values..are what they always are. Component-by-[RCV/ACV]-component.

  • J. Williams

    Chip, I don’t see the public comments available on the provided link any longer. Do you know where this issue stands? I ask as a contractor that has utilized the mentioned bulletin when negotiating with insurers. I’ve been laughed at and told things such as ‘come up with a bulletin that was published within the last year and we’ll review it’. I am well aware of when O&P is called for and when it is not. When I have been required to use 5 different sub contractors for one H.O. claim and I am told it is not complex enough, not enough trades, and yes, my subs did not have to travel far enough to call for O&P, it seems that even this bulletin had little to no weight when trying to have O&P added to a claim payout. I’ve even heard that an insurer has a policy to not pay O&P on the roof portion of a claim, but the adjusters are picking and choosing which line items they will pay on, which always end up being the lowest pay outs. I had somewhat of a chance with the bulletin, but without, I will have to turn down jobs requiring multiple subs. Is there any hope for a contractor?

    • J,

      I appreciate what you are saying. I am not certain what to say when adjusters brazenly ignore the law and have managers that must approve of them breaking laws to increase profits.

      Maybe the bulletins work better for us because we file complaints and enforce the

      The last time an Adjuster laughed at me, I sued her insurance company, Allstate,
      and turned it into a $25m class action lawsuit over a $450 dispute. The adjuster laughingly said to me that they did their act “all the time and to everybody.” Not anymore.

      The case was Doris Johnson vs ALLSTATE and resulted in a certified class action

      My best, and you may want to call our attorneys in our Denver office if adjusters keep laughing at breaking Colorado law.

      • J. Williams

        Thanks Chip! I will certainly keep you office in mind going forward!