Is Your Homeowner’s Policy Claim Being Underpaid?

If you have ever made a significant claim under a homeowner’s policy, you have likely been through a fairly devastating event.  Claims under homeowner’s policies arise from events such as fires, broken water pipes or storm damage, just to name a few.

Homeowners who have significant claims of this nature have usually suffered a loss of some items of personal property, as well as the loss of all, or part, of their living quarters.

The insurance adjuster typically knocks on the door when a homeowner is in a particularly vulnerable situation. The adjuster will want to survey the damage and then write a repair estimate that specifies the amount that the insurance company is willing to pay for the damage. The estimate will include both the cost of items to be repaired or replaced and the cost of labor to repair or replace them. Here are some things to keep in mind when you try to determine whether to accept the insurance adjuster’s offer based upon the damage estimate:

Overhead and Profit

Let’s assume that your child (or your dog) knocks over a burning candle, starting a fire in your family room. There is damage to the carpeting, drywall, plumbing and electrical wiring behind the drywall, and to part of the roof, all caused by the fire.

The claims adjuster will survey the damage and write a repair estimate. He’ll include a fair amount to buy new carpet and pay a carpet installer; another fair amount to buy and replace the drywall; and the same for a plumber, electrician and roofer.

Let’s also assume that you review the estimate with some contractors, and they all say that they can do the work for the amount set forth on the estimate. So you agree to accept the claims adjuster’s figure, you sign a release for the insurance company and you get a check. You have just been underpaid by about 20%

Under most homeowner’s policies, whenever three or more subcontractors in different trades are involved, there is a requirement that the insurer pay an amount for a general contractor’s “overhead and profit.” In most areas, the cost of a general contractor is about 20% of the total amount for labor and materials. Overhead and profit is owed whether or not you actually hire a general contractor to coordinate the subcontractors. So you may act as your own general contractor, but the insurance company would still be required to pay you for the general contractor’s overhead and profit.

A number of insurance companies have paid significant sums of money in class actions because of the fact that they have routinely not included the general contractor’s overhead and profit in their estimates when three or more trades are required to do the repair and/or replacement work.


Using the same example above, let’s assume that, at the time of the fire, your house, and everything in it, was 30 years old. 30-year-old carpet that was damaged in the fire will be replaced with new carpet. The 30-year-old wiring and the 30-year-old roofing will be replaced with new wiring and new roofing. Your insurance company is, therefore, entitled to deduct a percentage for depreciation because of the fact that the depreciated items are being replaced with new items.

Frequently, claims adjusters will write the estimate including the cost of the replacement of parts of the structure, as well as labor for replacing those items. The adjuster will then take a percentage of the total “bottom line” (say 25%) for depreciation. It is obvious that, when depreciation is taken as a percentage of the bottom line, the depreciation is being applied to both the cost of items as well as the cost of labor.  But, labor is not a depreciable cost

Again, several large insurers have paid significant amounts in class actions because their claims adjusters have routinely followed the practice of taking depreciation as a percentage of the bottom line, rather than on the individual items on the repair estimate.

Keep overhead, profit and depreciation in mind when deciding to accept the insurance adjuster’s offer based upon the damage estimate.

For more information, contact:
Ronald R. Parry

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