Can an insurance company or an adjuster refuse to pay the general contractor’s overhead and profit when indemnifying a homeowner’s claim for replacement of damaged property?

Not according to the Florida Supreme Court. In a July decision that many in the insurance restoration industry—contractors who do such insurance claim-related work—view as significant, the court ruled that homeowners are entitled to the full cost of replacement, whatever that includes and whether or not the repair or reconstruction actually takes place.

Who Does the Work and When?

In Trinidad v. Florida Peninsula, published last month, Miami homeowner Amado Trinidad sued his insurance company when the company withheld the amount calculated to cover a general contractor’s overhead and profit from the check indemnifying him for damages following a fire. The insurance company, Florida Peninsula, argued that since Trinidad had yet to hire a general contractor, it was under no obligation to pay the overhead and profit until the job was completed. Insurance estimates typically calculate that amount as 20% of the estimated cost of reconstruction under a typical replacement value policy. The court found that a homeowner paying premiums on such a policy is entitled to the full cost of restoring the property. That cost, the court said, includes the general contractor’s overhead and profit if a general contractor could reasonably be expected or needed to perform that work.

Three Trades Rule Overruled

Prior to the ruling, most insurance companies operating in Florida used the “Three Trades” rule to determine whether or not to pay overhead and profit. “In order for a general contractor to bill for overhead and profit, there had to be a general contractor and there had to be three trades, or subcontractors,” says Paul T. Zeniewicz, an attorney working for the Winter Park, Fla., law firm  Cohen Battisti, which monitors legislation and rulings affecting the insurance restoration industry. 

That method typically excluded single trades such as roofing companies engaged in emergency repairs, or those specializing in mitigation services—dry-out, clean-up, etc.—but not contracted for reconstruction. The court’s decision, in effect, dispenses with the Three Trades rule, arguing that any insurance reconstruction job where a general contractor’s services might reasonably be required must include the additional 20%. The ruling also defines overhead to include “fixed costs to run the contractor’s business,” and profit as “the amount the contractor expects to earn for his services.” Both overhead and profit are now recoverable under a replacement value policy.

“What Florida’s highest court found,” Zeniewicz says, “is that where a GC is likely needed for insurance loss, the homeowner is entitled to be paid” for that cost.

How Contractors Are Paid

Samuel Bergman, president of Rolyn, a Rockville, Md., contractor with offices in six states and licenses to work in 35, says that the decision helps clarify how restoration companies are paid for what they do. “I’ve found that if you’re performing GC services, you will be paid for your overhead and profit,” Bergman says. On the other hand, he points out, companies engaged strictly in mitigation services, such as drying or cleaning, bill for rates and services and expect to earn their profit in the markup on their work since they perform no GC service. It’s the middle ground—where a company might have a few subcontractors involved to, say, clean, install drywall, and paint—that is ambiguous for insurers. And for restoration contractors, Bergman says, such situations can be bad financial news. “If you have unburdened rates and you’re not able to charge profit and overhead, you’ll make a little bit of cash flow, but at the end of the day you’re not going to be able to survive.”

Though the ruling involves a homeowner rather than a restoration contractor, the implications are clear when it comes to how reconstruction jobs are priced and paid for by adjusters and the insurance companies they work for. If a general contractor’s services are needed, profit and overhead are part of the cost.

Homeowners May Pocket the Difference

Though Trinidad v. Florida Peninsula applies to companies doing business in Florida, some feel it may have insurance companies rethinking their remuneration policies across the board. “It will change the way these losses are paid all over the U.S.,” says Jim Thompson, a Florida contractor specializing in commercial disaster reconstruction. Its point, he says, is that “the overhead and profit of the contractor is just as valid an expense as his labor and his 2x4s.”

Tracy Bachtell, vice president of business development for Paul Davis Restoration, a franchise that is one of the largest companies in the industry, says it has become more common for insurers to withhold 20% in ambiguous situations if only “to keep indemnity under control.” Bachtell points out that “there are three trends: They’re increasing deductibles, they’re reducing coverage, and some are moving to actual cash value or fair settlement amount, which takes us back to the ’50s and ’60s.” Actual cash value, in insurance terms, is defined as replacement cost minus depreciation.

As a writer and instructor on insurance restoration, Bachtell has also made the case that, in many instances, 20% in no way represents a valid overhead and profit figure for GC services performed by restorers in reconstruction projects but is merely an arbitrary number.

While “Trinidad” provides some clarity in pricing, its downside, Bachtell points out, is that it gives homeowners filing a claim the incentive to simply not hire a general contractor and pocket the 20% difference, which is essentially what Amado Trinidad and his lawyers argued that he had the right to do.

That is not something insurance restoration contractors welcome, Bergman says. And since “in theory, the extra 20% has to be on all claims, whether overhead and profit is incurred or not,” says independent Florida adjuster Peter Crosa, of Peter. J. Crosa & Co., “what I think we will see is additional fights on that point.” —Jim Cory is a contributing editor to REMODELING who is based in Philadelphia.