Overhead, Profits, and the Pandemic

Everyone struggled during the COVID-19 shutdowns, right? Well, a recent $140 million civil money penalty was leveled against insurer USAA by the U.S. Treasury Department's Financial Crimes Enforcement Network (FinCEN) for "not maintaining an anti-money laundering program" according to News 4 San Antonio. In short, their profits soared during the pandemic, and even though they made some policy dividends, premium credits, and other financial relief efforts, their "kindness" did not exceed their profits or reporting. 

Many consumers are callous to the headlines of "record profits" as it has been a hot topic for some time. But policyholders for homeowners and business property insurance should take note as this is a common point of contention where the carrier is often able to leverage the consumers' lack of knowledge in this area to shortchange themselves and their contractors.

Contractors who specialize in responding to (mitigation) and repairing damaged structures during the insurance claims process are no strangers to endless arguments regarding overhead and profit.

For the reader who may not be familiar with these terms,

• Overhead typically refers to those costs inherent to "doing business" that isn't directly applied to the costs of a particular project. For example, when you receive a bid from a plumber to install your toilet, they do not typically break out what percentage of the mortgage for their office space or the salary of their office manager is included in your bill, but you know as a consumer that they have to be making up for those real costs in some way.
• Profit is what separates a business from a hobby. If a company is not profitable, they do not have the resources to fund growth or any real incentive to be a business. 

These are very simplified definitions but they should be helpful in framing what we are about to discuss. If you file an insurance claim because there is damage to your home, you likely will work with a property restoration contractor who specializes in navigating the nuances of the insurance claims process. It should be known that only within the insurance claims paradigm is overhead and profit presented as a markup, often observed as "10 and 10" (10% overhead and 10% profit). Whereas in the example from above the O&P is embedded into the overall cost of goods and services.

When you go to the grocery store, the price of a tomato includes the "loaded" cost, i.e. the overhead and profit of the grocery chain is included in the price that you pay. It's the same as when you purchase your insurance policy for your home. Your insurance company does not show you what their overhead costs are or how much they plan to profit for the year; the cost is the cost. 

If you file an insurance claim for damages to your home, you may find that you learn more about the inner workings of the insurance claims process than you ever wanted to know. You may find that your contractor composes an invoice for their drying services or an estimate for their repair services and one of the many potential arguments may be over the structuring of overhead and profit. Just so we are clear:

• Overhead and profit are accounted for when you purchase your policy as you can be sure your insurance company is including their overhead and profit in their quote to you. You paid for O&P. 
• Overhead and profit are necessary and customary for contractors. O&P should be paid by your insurance carrier to your contractor as costs of the goods and services they are providing. 

A recent article demonstrated that a prominent insurance carrier, USAA, benefited from reduced driving by their insureds during the pandemic. Reduced driving resulted in reduced automobile accidents which resulted in reduced cost of anticipated payouts on claims. On the one hand, the insurance carrier provided the same level of coverage for the cost quoted, so there was a net-zero effect on the insured. Yet, a lawsuit alleges that,

"At least 30% average refund of paid premiums would be required to make up for the excess amounts paid by consumers for just the period between mid-March and the end of April 2020."

USAA was aware of the windfall and continued to charge the same rates throughout 2020 and 2021. Your costs for your insurance premiums may have gone down some, but your carrier likely still hit or beat their profit goals. Your local contractors were shut down and/or had their costs for goods and services increased.  

If you happen to be reading this, understand that when a contractor and the carrier are engaged in a heated discussion about whether overhead and profit are owed on your insurance claim, insurance companies have consistently defended their "right" to both O and P. Contractors don't disagree that businesses should cover their indirect expenses (overhead) and maintain a healthy profit, but are frustrated when the insurance company negates their responsibility to provide the consumer and the contractor with access to the same considerations.

The policy that you purchased included the insurance company's O&P as well as the risk of covering these costs in the event of a claim. You paid for O&P. Keep this in mind if there is a scenario where your insurance representatives are arguing against the scope and cost of the work that your chosen contractor is presenting. O&P should be paid by your insurance carrier to your contractor. And if you are insured with USAA, you may want to keep following this case.