What Does O&P Stand for on an Insurance Claim?

Navigating an insurance claim after property damage can be challenging. Understanding the terms and components of your claim is important for a fair resolution. Certain costs are often included to account for the comprehensive management of repairs, facilitating restoration to its pre-loss condition.

Understanding O&P

In the context of property insurance claims, “O&P” stands for Overhead and Profit. This term is frequently encountered in situations involving significant repairs or reconstruction where a general contractor’s services are necessary to manage the project. O&P represents the indirect costs and financial gain that contractors include in their estimates for construction or repair work. It is a standard component in certain types of claims, reflecting the business expenses and compensation required for a contractor to operate and complete repairs effectively.

This inclusion acknowledges that restoring damaged property often requires more than just the direct costs of materials and labor. General contractors incur various operational expenses and expect compensation for their expertise and coordination efforts. Therefore, O&P ensures that the estimate for repairs realistically accounts for the overall management of a complex project.

Breaking Down Overhead and Profit

Overhead encompasses the indirect costs a general contractor incurs to run their business, not directly tied to specific materials or labor. These expenses are necessary for project completion and include items such as project management and supervision. Examples of overhead costs include:
Office rent
Utilities
Administrative staff salaries
Office supplies
General liability insurance
Workers’ compensation
Permitting fees
Depreciation on office equipment and vehicles

Profit, on the other hand, represents the general contractor’s compensation for coordinating the entire repair project. This includes their financial gain for assuming the inherent risks associated with construction work and ensuring the project is completed to acceptable standards. While overhead covers the cost of doing business, profit is the margin a contractor earns for their expertise and the successful delivery of the repair. Typically, O&P is expressed as a percentage of the total job cost, often seen as “10 and 10,” meaning 10% for overhead and 10% for profit, totaling 20% on top of direct costs.

Applicability in Insurance Claims

O&P is typically included in an insurance claim when the scope of work necessitates a general contractor to manage repairs. This usually occurs in situations involving complex damage that requires coordination among multiple trades. For instance, a general contractor is essential to manage diverse services like roofing, plumbing, electrical, and carpentry.

A common benchmark used by insurers is the “three-trade rule,” which suggests O&P inclusion if three or more trades are required. This rule acknowledges the increased complexity and coordination efforts needed for such projects. Even if a policyholder does not intend to hire a general contractor, O&P may still be factored into the settlement if the use of one is reasonably likely for the repairs.

How O&P Affects Your Claim

Understanding O&P is important for policyholders as it directly contributes to the total cost of repairs and the overall settlement amount for complex claims. It ensures a general contractor is fairly compensated for managing the project, encouraging qualified contractors to take on the work. This benefits the policyholder by ensuring a coordinated, professional, and efficient repair process.

Without O&P, insurance settlements might not fully cover the real-world costs contractors face, potentially leading to delays or lower-quality repairs. While insurance companies generally accept the combined 20% O&P charge for repairs requiring subcontracting, policyholders may sometimes need to advocate for its inclusion. Its presence helps restore damaged property effectively, reflecting full market costs.