How Insurers & Adjusters Can Underpay Basic Construction Replacement Cost Values
Many contractors and consumers that are involved in establishing/estimating replacement costs for a catastrophe damaged home or business may run into a very unfair and irrational construction estimation methodology that some insurers try to force on naive or even educated insurance claimants.
To understand how it works, look at the two estimation examples at the bottom of this article.
The first estimate is a common and historically basic "Cost Plus 10% Profit" type construction estimate.
The second is a insurer contrived synthetic construction estimate.
As you compare the two estimates, keep in mind that common sense dictates that from the roof to the foundation, each construction component's costs contain general contractor and specialty contractors business costs, which would include their own overhead and profit costs.
These are necessary and INHERENT construction replacement costs, (like materials and labor), insurers & insurance agents account for, yet insurance adjusters may try to avoid disclosing and paying to claimants, whether they use a contractor or not.
Does the Texas Department of Insurance Condemn or Condone -
- Insurers Unfair Claim Estimate-Payments to Home & Business Owners?
Question: What is one MAJOR claim underpayment scheme being forced on post-catastrophe home and business owners, (all across Texas), as this note is being written 7-1-2009...??
Hint: As mentioned, it has to do with common construction replacement costs that are paid for every month by unsuspecting consumers...as part of their home and/or business protection insurance payment.
Answer: Insurers are not openly and objectively returning general contractor (G.C.) overhead and profit (O&P) costs, or in other words, intrinsic "loss values".
Why should that be a concern to [Texas] citizens as consumers, and contractors?
(Special Note: Nationwide Insurance settled May-2009 for paying approximately 700,000 G.C. O&P underpaid claimants.)
Well, if a contractor charged you for 40 year shingles, and 30 pound felt, yet (since HE knows they look practically the same from the ground), used your inexperience in construction to intentionally install 30 year shingles and 15 pound felt, and the contractor alone knows they could (unfairly) pocket the extra money you had trusted them with), would you feel as if they had defrauded you?
The Texas Department of Insurance has easy to read information to help you make sure that, whether you use a [general] contractor or not, you are paid for your loss properly. The TDI does not want us to be intentionally or unintentionally defrauded. They do not want insurers to make "illegal windfall".
TDI Bulletins B0045-98 & B0068-08 makes it clear that insurers, adjusters and agents should not unfairly or intentionally deduct, or keep, money you are owed. TDI Bulletin B0045-98 states that replacement costs of your insured structure has a "prospective contractors' overhead and profit" built into it.
Bulletin B0068-08 confirms the fact.
Quote B0045-98: "There is NO SITUATION in which the deduction from replacement costs of... overhead and profit...will be the correct measure of the insured's loss".
--See below for a "correct measure" example of basic construction estimation math form--
From childhood, many have heard about the [primary/general] contractor "Builder Bob". Further common life experience shows that replacing structures reasonably and likely requires "prospective" general contractors fair and equitable replacement costs, using various specialty tradesmen.
In short -- General Contractor Costs + Roofing Contractor Costs = New Construction Roofing Costs, or conversely, The Insured Replacement Cost Value of Your Roof!
Yes, COMMON SENSE DICTATES; You have pre-paid for a prospective G.C. to contract with you to repair or replace your insurance protected roof, AND, every other part of your home or business along with it.
So if an insurance adjuster tries to cut out approximately 20-59% (or more) of common contractor market overhead cost, and profit cost, and sales tax cost, report that act to the Texas Department of Insurance, or your state's insurance department, so that they can help protect you from being treated unfairly, or financially defrauded.
http://www.tdi.state.tx.us TDI Fraud Unit - 1-512-463-6492 / 1-888-327-8818 FraudReport@tdi.state.tx.us
Contrived Excuses Insurers, Adjusters & Insurance Agents May Use To Underpay Your Insurance Claim
Many contractors, consumers, and adjusters are familiar with the following claims:
1. "We don't pay general contractor overhead & profit on roofing in [Texas]". (Unfair basic "fair market" construction estimation and loss value logic.)
2. "The damage is really not severe enough to require a general contractor". (Actually, in a fair market a G.C. determines what work they require, not an insurance company.)
3. "You really don't "need" a general contractor to repair or replace the roof...you can hire a roofing contractor directly". (People pay insurance premiums values for total general contractor involvement for the replacement of every construction component of their structure.
People do not pay premiums to problem solve as an educated and experienced general contractor would when repairs are needed for single trade damage work, like siding or roofing work.) They pre-pay for a trusted general contractor of their choice.
4. "More than 1-3 trades are needed before we "allow" general contractor prices".~ (Double-Speak logic that helps insurers keep general contractor O&P values woven into the 1-3 trades, or ANY trades work.)
5. "Roof Contractors "unit costs" include overhead and profit costs".# (Maybe so, maybe not, but by themselves they DO NOT contain general contractor O&P value).
6. If we (repaid) general contractor O&P costs on all claims, we would have to raise rates. (Why would rates have to be raised when G.C. O&P costs are already being charged to consumers?)
7. "If we paid general contractor and roofing contractor overhead and profit costs for roof losses, we would be improperly paying twice for overhead & profit costs". (Do the math below. This is simply, not true, and more double-speak).
Remember this basic fact - Most likely a general contractor built your home or business, and so their own business overhead costs and profit costs, along with the individual specialty trade contractors business overhead and profit costs, are woven into the roof and every other piece of the structure. Period.
Your insurance agent determined replacement costs accordingly. From the roof to the foundation, you have prepaid for a general contractor to fully replace your property, and/or partially replace it.
DO NOT BE MISLED! The insurer will NOT be improperly paying twice for overhead and profit, when they pay once properly for the general contractor + roofing contractor value of your roof, or other loss.
Fair & Unfair Construction Market Estimation Practices
(Imagine these are wind/hail/rain/fire/earthquake etc. damage replacement cost value (RCV) estimates.)
Basic Fair Market Contractor Example
6,800.00 - Remove and Replace Roof Shingles
850.00 - Remove and Replace Guttering
4,600.00 - Remove and Replace Siding
900.00 - Remove and Replace Windows
3,400.00 - Remove and Replace Sheetrock
5,800.00 - Remove and Replace Carpeting
22,350.00 - Sub-Total
2,350.00 - 10% Overhead
24,700.00 - Total (Cost)
2,470.00 - 10% Profit
$27,170.00 - Grand Total (Correct cost plus 10% profit math.)
A historically fair and reasonable ("Builder Bob") line itemed estimate that shows logical and elementary "Cost plus 10% Profit" mathematical form.
Basic Unfair Insurer/Adjuster Example
6,800.00 - Remove and Replace Roof Shingles
850.00 - Remove and Replace Guttering
4,600.00 - Remove and Replace Siding
900.00 - Remove and Replace Windows
3,400.00 - Remove and Replace Sheetrock
5,800.00 - Remove and Replace Carpeting
22,350.00 - Sub-Total
975.00 - 10% OH (G.C. Roof/Carpet O&P Costs Ignored)**
23,325.00 - Total (Underpaid)
975.00 - 10% Profit (Underpaid)
$24,300.00 - Grand Total (Underpaid $2,870)
**G.C. 20% overhead and profit is unfairly missing towards the roof/carpet work ONLY, and G.C. O&P is improperly summed up as the same price each, thus the 10% profit math is obviously, yet deceptively, false.
~Allstate Ins. actually (misuses) the main contractor's O&P line for specialty trade contractors 29% OP. They pay a 49%+ factor for G.C./Specialty trade contractors combined O&P, but will also unfairly claim that losses need a certain damage level to warrant G.C. work.
#Roof Contractor "unit costs" do not contain G.C. O&P in estimating programs historical data.
So, in summary, understand that your or other insured structures did not "Poof" into place, and that a general contractor using specialty contractors are financially accounted for by insurance agents construction replacement cost values...values that general contractors costs helped determine nationwide!
From the roof to the foundation, help your insurance adjuster to estimate accordingly...or in other words, fairly and equitably.
