Overhead & Profit: When Your Claim Should Include O&P

Overhead and Profit — commonly called O&P — is one of the most frequently disputed line items in property insurance claims. It refers to the general contractor's fee for managing a repair project: typically 10% overhead (business expenses) and 10% profit, for a combined 20% on top of the direct repair costs.

Insurance carriers deny O&P on claims constantly. It is one of the most common ways they reduce payouts, and most policyholders never realize money is missing from their settlement. The carrier strips it off the estimate quietly, buries the reasoning in jargon, and hopes you will not ask questions.

On a $50,000 repair, O&P adds roughly $10,000 to the claim. On a $60,000 repair, the difference is $12,000. On a $150,000 fire loss, it is $30,000. This is not a rounding error. It is a substantial portion of your claim, and you are entitled to it whenever a general contractor is reasonably likely to be involved in your repairs.

This article explains what O&P actually is, where the numbers come from, why the carrier's favorite excuse for denying it has no legal basis, the case law from seven jurisdictions that supports the policyholder's position, and what you might consider doing if your own claim is being shorted.

What Is Overhead and Profit?

When you hire a general contractor to manage a repair project, they do not work for free. They coordinate subcontractors, pull permits, schedule inspections, order materials, handle callbacks, and keep the project on track. For that work, they charge overhead and profit on top of the direct costs of labor and materials.

The industry standard is 10% overhead plus 10% profit. This is not some inflated number that contractors invented. It is what the market bears for general contracting services on residential repair work. Xactimate — the estimating software used by virtually every insurance company in the country — treats 10 and 10 as the default when O&P is applied.

Here is the critical point that most people miss: Xactimate's unit pricing does NOT include general contractor overhead and profit. The line item prices in Xactimate reflect the cost of a subcontractor performing the work — the painter, the plumber, the drywall finisher. They do not include any fee for a general contractor to manage those subs. O&P must be added on top of the line item totals.

When the insurance company gives you an estimate without O&P, they are telling you that you should act as your own general contractor. They are assuming you will personally hire each trade, schedule them in the right sequence, verify code compliance, manage quality control, and deal with the inevitable problems. That is not a reasonable assumption for most homeowners dealing with a significant loss.

The Three Overhead Categories

Xactimate's own documentation breaks overhead into three distinct categories. Understanding these matters because carriers frequently confuse them — sometimes deliberately — to justify removing legitimate costs from your estimate.

General Overhead

General overhead is the cost of running a contracting business that cannot be attributed to any single project. This includes office rent, administrative staff salaries, licensing fees, advertising, general liability insurance, vehicle costs, accounting, and all the other expenses a contractor pays whether they have one job or twenty.

This is the “10% overhead” that gets applied as a percentage on the estimate. It compensates the general contractor for the share of their fixed business expenses that each project must carry. Every legitimate contracting business has these costs, and they are real.

Job-Related Overhead

Job-related overhead consists of costs that are specific to a particular project but not attributable to any single task within that project. Examples include project managers and supervisors assigned to the job, portable sanitation facilities, temporary power, site security, perimeter fencing, dumpster rental, and temporary weather protection.

This is an important distinction: job-related overhead should appear as separate line items on the estimate, not as a percentage. These are real, measurable costs that vary by project. A large fire repair that runs six months will have significant supervision and site costs. A smaller water loss might have none. Each project gets priced based on what it actually requires.

Job-Personnel Overhead

Job-personnel overhead covers the employer's cost of having workers on the job — payroll taxes, workers' compensation insurance, health benefits, and similar labor burden items. This category is already built into Xactimate's labor rates. No separate charge is needed, and no one is suggesting one should be added.

The reason this category matters is that carriers sometimes argue “overhead is already in the line items.” They are confusing job-personnel overhead (which is included) with general overhead (which is not). These are fundamentally different costs, and Xactimate's documentation makes this clear.

The Three-Trade Rule: Industry Shorthand for a Legal Standard

Ask an insurance adjuster why O&P was excluded from your estimate and you will almost certainly hear some version of the “three-trade rule.” The claim goes like this: O&P is only owed when three or more trades are involved in the repair. Fewer than three trades means the homeowner can manage it themselves, so no general contractor is needed, so no O&P is owed.

That framing gets the rule exactly backward. The three-trade threshold, as understood in the adjusting industry, is a floor for when a general contractor is presumptively needed — not a ceiling. And the rule itself is a practical shorthand for a legal principle that appellate courts across the country have adopted and enforced for decades. The principle is straightforward: overhead and profit are owed whenever a general contractor is reasonably likely to be needed.

It is true that no state legislature has enacted a statute that says “when three trades are required, overhead and profit shall be paid.” The phrase “three-trade rule” does not appear in any insurance code, in California's Fair Claims Settlement Practices Regulations, or in the NAIC model acts. Adjusters who tell policyholders that “the three-trade rule doesn’t exist” are technically correct about its statutory codification. They are wrong about everything else.

The substance of the rule — that when multiple trades are required, a general contractor is reasonably likely to be needed, and therefore O&P must be paid — is not an industry invention. It is the holding of appellate decisions from Pennsylvania, Florida, Arizona, Oklahoma, New York, the Seventh Circuit, and federal courts applying Texas law. Each of those decisions examined the specific facts before it, and each concluded that the need for multiple trades is strong evidence that general contractor services are reasonably necessary.

What the Three-Trade Rule Actually Means in Practice

The three-trade rule, as understood in the insurance adjusting industry, holds that when a property repair requires three or more distinct trades — such as roofing, plumbing, electrical, drywall, painting, or flooring — the scope of work is complex enough that a general contractor would reasonably be needed to coordinate and oversee it. When a general contractor is needed, the insurer owes overhead and profit as part of the claim payment.

The rule originated not from a court decision or a statute, but from the practical reality of construction. A homeowner can reasonably manage a single-trade repair — calling a plumber to fix a burst pipe, for example. But when the burst pipe also damages drywall, flooring, electrical outlets, and cabinetry, the homeowner is no longer managing a plumbing repair. They are managing a construction project. That project requires someone to schedule the trades in the correct sequence, ensure the work of one trade does not conflict with another, handle permitting and inspections, and take responsibility for the finished result.

That someone is a general contractor. And general contractors do not work for free.

Even a two-trade job can warrant O&P. If your bathroom flood requires plumbing repairs and a full tile rebuild, that project involves sequencing, waterproofing inspections, and material coordination. A homeowner should not be expected to manage that themselves just because only two trades are technically involved.

The Legal Standard: “Reasonably Likely”

While the three-trade rule itself is an industry guideline, the legal principle it represents has been established by courts across the country. The standard is this: overhead and profit must be included in the insurer's payment whenever the use of a general contractor is reasonably likely— regardless of whether the policyholder has actually hired one.

This standard reflects a basic principle of insurance law. A replacement cost policy promises to pay the cost to repair or replace damaged property. That cost includes all expenses the policyholder is reasonably likely to incur — materials, labor, permits, sales tax, and general contractor overhead and profit when the scope of work warrants it.

The insurer does not get to strip out a component of the repair cost simply because the policyholder has not yet spent the money. Insurance is supposed to put the policyholder in a position to make the repair. It is not supposed to underpay and then argue that the policyholder failed to prove they spent money they were never given.

The Case Law: Seven Jurisdictions, One Principle

The principle that O&P is owed when a general contractor is reasonably likely to be needed has been adopted by appellate courts in Pennsylvania, Florida, Arizona, Oklahoma, and New York, the Seventh Circuit Court of Appeals, and federal courts applying Texas law. Each of these decisions reinforces the same core holding: the entitlement to overhead and profit does not depend on whether the policyholder actually hired a general contractor.

Pennsylvania: The Foundation

Pennsylvania's courts built the framework that most other jurisdictions have followed.

In Gilderman v. State Farm Insurance Co.(1994), the Pennsylvania Superior Court established that when multiple trades are required for repairs, it is “reasonably likely” that general contractor services will be needed. The court held that repair or replacement costs include “any cost that an insured is reasonably likely to incur,” and that this includes general contractor overhead and profit. The insurer may not automatically deduct O&P from advance actual cash value payments.

649 A.2d 941 (Pa. Super. 1994). Read the opinion on Justia.

Twelve years later, Mee v. Safeco Insurance Company of America (2006) reinforced Gildermanand added a structured framework for determining when O&P is owed. The Mees' home sustained damage from a toilet overflow that ultimately required six different trades to repair. Safeco denied overhead and profit because the Mees did not hire a general contractor.

The Superior Court reversed, establishing a three-factor test:

1. The extent of the property damage. More extensive damage is more likely to require professional coordination.
2. The number of trades required. When multiple trades are needed — in the Mees' case, as many as six — professional oversight becomes reasonably necessary.
3. Expert evidence regarding building industry standards. Industry practice connecting the number of trades to the need for a general contractor is relevant evidence.

The court held that O&P must be included as part of the actual cash value payment, not merely as part of replacement cost. And critically, the insured need not actually hire a general contractor to be entitled to O&P — the standard is whether a general contractor is reasonably likely to be needed, not whether one was actually used.

908 A.2d 344 (Pa. Super. 2006). Read the opinion on CourtListener. Also available on FindLaw and Justia. Mee is Pennsylvania authority — persuasive in California, not binding.

Florida: The Supreme Court Weighs In

Florida's highest court addressed the question directly in Trinidad v. Florida Peninsula Insurance Co. (2013), producing what is now the leading authority in the state.

Trinidad's home sustained fire damage. Florida Peninsula refused to include overhead and profit in its payment. The case reached the Florida Supreme Court on a certified question from the Fifth District Court of Appeal.

The Court's holding was unambiguous: overhead and profit must be included in the insurer's payment under a replacement cost policy when the policyholder is “reasonably likely to need a general contractor for the repairs.” The Court explained that O&P is “like all other costs of a repair” — it is no different from the cost of labor or materials. Eliminating O&P from the replacement cost payment would provide the policyholder with less coverage than an actual cash value policy, which would contradict the entire purpose of replacement cost coverage.

The Court rejected any rigid numerical threshold. Whether a general contractor is reasonably likely to be needed is a factual determination that depends on the specific circumstances of the loss — not a mechanical count of trades.

121 So. 3d 433 (Fla. 2013). Read the opinion on FindLaw.

Arizona: Following Pennsylvania's Lead

In Tritschler v. Allstate Insurance Co.(2006), the Arizona Court of Appeals adopted Pennsylvania's reasoning and applied it to a case where the absurdity of the carrier's position was on full display.

Allstate sent its own preferred vendor — Better Way — to inspect and estimate the damage to Jules Tritschler's home after rain damage. Better Way prepared a $44,471 estimate that included 10% overhead and 10% profit. Allstate then refused to pay the O&P portion of its own vendor's estimate.

The court held that actual cash value is an estimate of needed repairs, and that the determination of whether O&P is owed does not depend on what the insured actually pays. The question is whether a general contractor is reasonably necessary for the scope of work — and Allstate's own vendor had already answered that question by including O&P in the estimate.

Tritschler also addressed proof-of-hire arguments directly: the carrier took the position that it would only pay O&P if the insured actually hired a general contractor and provided proof. The court rejected this. Replacement cost means the cost to replace or repair using methods and materials of like kind and quality — and that cost includes a GC's fee when one would reasonably be needed, whether or not the homeowner actually engages one.

213 Ariz. 505, 144 P.3d 519 (Ariz. Ct. App. 2006). Read the opinion on FindLaw.

Texas: Federal Court and the Insurance Commissioner

In Ghoman v. New Hampshire Insurance Co.(2001), the federal court for the Northern District of Texas granted the policyholder's motion for partial summary judgment on breach of contract. Ghoman owned a Howard Johnson hotel that sustained wind and hail damage. The appraisal valued replacement cost at $299,907, but New Hampshire Insurance tendered only $190,414, withholding $48,083 in contractor overhead and profit and $22,856 in sales tax.

The court held that replacement costs “should include any cost that an insured is ‘reasonably likely to incur’ in repairing or replacing a covered loss.” O&P and sales tax “clearly fit into this definition and should be included in both the replacement cost and actual cash value amounts.” This is the “reasonably likely” standard that several jurisdictions have adopted. It asks what costs a reasonable homeowner would face, not what the particular homeowner actually spent.

159 F. Supp. 2d 928 (N.D. Tex. 2001). Read the opinion on Justia.

The Texas Department of Insurance weighed in even earlier. In Commissioner's Bulletin B-0045-98, issued June 12, 1998, the Department declared that “the deduction of a prospective contractor's overhead and profit and sales tax, in determining the actual cash value under a replacement cost policy, is improper.” The bulletin characterized the withholding of O&P as an “illegal windfall”for the insurer — language that reflects how seriously Texas regulators view the practice.

Read Bulletin B-0045-98 on the Texas Department of Insurance website.

Oklahoma: The Three-Trade Rule as Class Boundary

Burgess v. Farmers Insurance Co. (2006) is particularly significant because the Oklahoma Supreme Court explicitly used the three-trade threshold as the defining boundary for a class action.

The class was defined as claimants whose claim files reflected that three or more tradeswere anticipated in the property repair. General contractor overhead and profit was defined as 20% of ACV (10% overhead plus 10% profit). Class members received the 20% O&P payment plus 8% interest, less any amounts previously paid.

This is notable because the court did not merely acknowledge the three-trade rule as an industry guideline — it used three trades as the operative threshold for determining class membership. The practical effect was to establish, in the context of that litigation, that claims involving three or more trades presumptively warrant O&P.

151 P.3d 92, 2006 OK 66 (Okla. 2006). Read the opinion on Justia.

New York: Replacement Cost Is Inherently Hypothetical

In Mazzocki v. State Farm(2003), the New York Appellate Division, Third Department addressed the carrier's argument that O&P should not be paid because the policyholder had not yet hired a general contractor. The court rejected that argument, holding that State Farm was obligated to include general contractor overhead and profit in replacement cost calculations — and therefore in actual cash value — whenever a contractor was reasonably likely to be needed for the repair or replacement.

The reasoning is straightforward. Every component of a replacement cost estimate is prospective — the materials have not been purchased, the labor has not been performed, the contractors have not been hired. If the hypothetical nature of the cost were grounds for exclusion, the insurer would owe nothing at all. The need for a general contractor is no more or less hypothetical than the need for shingles, drywall, or paint.

1 A.D.3d 9, 766 N.Y.S.2d 719 (N.Y. App. Div., 3d Dept. 2003). See discussion in Merlin Law Group, “Entitlement to Overhead and Profit on an Actual Cash Value Estimate”.

Seventh Circuit: The Federal Appellate Standard

In Windridge of Naperville Condominium Association v. Philadelphia Indemnity Insurance Co. (2019), the Seventh Circuit Court of Appeals held that if a general contractor is required to repair damaged property, the insurer must pay overhead and profit regardless of whether one was actually hired. The court applied the industry-standard “10 and 10” — 10% overhead and 10% profit.

932 F.3d 1035 (7th Cir. 2019). Read the opinion on Justia.

The pattern across these cases is consistent. Courts look at whether a general contractor's involvement is reasonably likely given the scope of work. They do not count trades and apply an arbitrary threshold. They do not require the homeowner to prove they actually hired a GC. They ask a simple question: would a reasonable person hire a general contractor for this project?

The Caveat: When Policy Language Explicitly Restricts O&P

Not all of this case law cuts uniformly in favor of policyholders. In Kurach v. Truck Insurance Exchange (2020), the Pennsylvania Supreme Court held in a 4-3 decision that the insurer could withhold general contractor overhead and profit from ACV payments.

The holding was narrow and fact-specific. The policy in Kurachcontained explicit language conditioning O&P payment on the insured actually incurring and paying those costs. The policy stated:

“actual cash value settlements will not include estimated general contractor fees or charges for general contractor’s services unless and until you actually incur and pay such fees and charges.”

The Court distinguished rather than overruled Gilderman and Mee. It held that those earlier decisions involved policies that were silent on O&P, making them factually distinguishable. Where a policy does not contain explicit GCOP-withholding language — which covers most standard homeowner's policies — the Mee and Gilderman framework remains controlling law in Pennsylvania.

The lesson of Kurachis not that O&P can be freely withheld. The lesson is that policy language matters, and policyholders and their representatives should review the specific policy at issue before asserting an O&P claim.

235 A.3d 1106 (Pa. 2020). Read the opinion on Justia.

State Regulatory Authority

Beyond case law, state insurance regulators have independently addressed the O&P question.

Texas— Commissioner's Bulletin B-0045-98 (1998) states that withholding O&P from ACV under a replacement cost policy is “improper” and constitutes an “illegal windfall” for the insurer.

Colorado— DORA Bulletin B-5.1 (1998) prohibits insurers from deducting contractors' overhead and profit in addition to depreciation when policyholders do not repair or replace the structure. No dollar threshold or complexity requirement.

California— California presents a different picture from the states surveyed above. There is no published California appellate or Supreme Court decision that directly adopts the “reasonably likely” standard or the three-trade rule, and the California Department of Insurance has not issued a bulletin specifically naming O&P. That gap is worth acknowledging honestly.

What California does provide is the Fair Claims Settlement Practices regulations (10 CCR § 2695.9), which require that insurer estimates reflect costs that will “restore the damaged property to no less than its condition prior to the loss” using “accepted trade standards for good and workmanlike construction” at costs “accurate and representative of costs in the local market area.” When repairs of that scope require a general contractor, the regulation supports the position that the estimate must include the cost of one. The out-of-state authority above is persuasive, not binding, in California courts.

Read California’s regulation at Cornell LII.

Tennessee— Tenn. Code Ann. § 62-6-102(3)(A) defines a “contractor” as a person who undertakes construction work when the total cost of the project is $25,000 or more. Subcontractors performing electrical, mechanical, plumbing, or HVAC work must hold their own licenses at the same threshold. The dollar threshold — not a count of trades — is what triggers Tennessee's licensing requirement, but on most multi-trade losses involving structural repair, the project will exceed $25,000 and a licensed general contractor will be required.

A comprehensive state-by-state chart of O&P requirements, compiled by Matthiesen, Wickert & Lehrer, is available as a reference document.

Download the 50-state GC O&P chart (PDF).

Why “The Three-Trade Rule Doesn’t Exist” Is the Wrong Argument

When someone tells you that the three-trade rule doesn’t exist, they are making a statement about statutory codification. No legislature has enacted a statute using that phrase. That much is true.

But the argument confuses the name of the rule with the substance of the rule. The three-trade rule is not a statute. It is an industry shorthand for a legal standard that has been adopted by appellate courts in at least seven states and the Seventh Circuit, applied by federal courts in multiple others, and endorsed by state insurance regulators in Texas, Colorado, and elsewhere.

The substance of the rule — that when multiple trades are required, a general contractor is reasonably likely to be needed, and therefore O&P must be paid — is not an industry invention. It is the holding of Gilderman, Mee, Trinidad, Tritschler, Ghoman, Burgess, Mazzocki, and Windridge. Each of those decisions examined the specific facts before it, and each concluded that the need for multiple trades is strong evidence that general contractor services are reasonably necessary.

Consider how many foundational insurance law concepts exist without statutory codification. The implied covenant of good faith and fair dealing is not defined in most insurance codes — courts created it. The reasonable expectations doctrine is not a statute — it is a judicial construct. The concept of “bad faith” itself has no universal statutory definition — it was developed through decades of case law. No one argues that these principles “don’t exist” simply because a legislature never used those exact words. The three-trade rule is no different. The name is shorthand. The law is real.

Attorney Kelly Kubiak, then of the Merlin Law Group, addressed this directly in a video on overhead and profit, explaining the “reasonably likely” standard that underlies the three-trade shorthand. One commenter's reaction captured the problem precisely: “I always thought you either had to have a contract or three trade or more, I never heard of reasonably likely.” That gap between what adjusters think the rule is and what the law actually requires is where policyholders lose money.

Supervision as a Separate Line Item

This is one of the most misunderstood aspects of O&P disputes, and carriers exploit the confusion aggressively.

Xactimate's own documentation classifies direct job supervision — a project manager or superintendent on site managing the work — as job-related overhead. It is not part of general O&P. It is a separate cost category that should appear as its own line item when the project warrants it.

Carriers routinely remove supervision line items with the explanation that supervision is “already included in overhead and profit.” This is incorrect based on the carrier's own estimating software documentation. General O&P compensates for fixed business expenses and the contractor's profit margin. Supervision is a variable, project-specific cost for having a qualified person physically present to manage the work.

Think of it this way: general overhead pays for the contractor's office, their bookkeeper, and their truck. Supervision pays for the person who shows up at your house every day to make sure the drywall crew does not cover up the plumbing before inspection. These are obviously different things.

When Supervision Belongs as a Separate Line Item

• Multi-phase projects where trades must be carefully sequenced (demolition before rough-in, rough-in before inspection, inspection before close-up)
• Projects requiring code compliance verification at multiple stages
• Work involving coordination across three or more subcontractor crews
• Projects where material deliveries must be staged and protected
• Any scope where the GC would reasonably assign a project manager or superintendent to the job rather than checking in periodically

On a typical fire loss or major water damage claim, supervision is not optional. It is how construction works. The carrier knows this. Their own field adjusters see supervised projects every day. When they strip the line item, they are counting on you not knowing the difference.

When O&P Is Owed — The Real Standard

Forget the three-trade rule as a ceiling. The actual standard for when O&P belongs on an estimate comes down to one question: is it reasonably likely that a general contractor will be involved in these repairs? Here are the factors that answer that question:

• Multiple trades are required.If the repair involves more than one specialty — plumbing and drywall, roofing and painting, electrical and framing — someone has to coordinate them.
• The project requires scheduling and sequencing. Trades cannot all show up on the same day. Demo comes before framing. Framing comes before electrical. Electrical comes before drywall. Someone has to manage this timeline.
• Inspections are required. Building permits mean inspections, and inspections mean someone has to be available to meet the inspector, address any corrections, and schedule the next phase.
• The homeowner cannot reasonably self-manage.Most homeowners do not know how to coordinate construction. They do not know the sequence of trades, the inspection requirements, the material lead times, or how to manage quality. The policy is supposed to put them back where they were — not force them to become project managers.
• The scope is complex enough that self-management is impractical. A single coat of paint on one wall? Maybe no GC needed. A kitchen rebuild with plumbing, electrical, cabinets, countertops, flooring, drywall, and paint? No reasonable person would manage that without professional help.

The key principle running through all of this: O&P is based on what is “reasonably likely,” not what actually happened. The carrier cannot deny O&P because you have not yet hired a GC. The carrier cannot deny it because you chose to manage part of the project yourself. The estimate reflects what the repairs would cost if done properly through normal channels — and normal channels include a general contractor on any project of meaningful complexity.

Common Carrier Arguments and How to Respond

Here are the arguments you will hear from the insurance company, and why each one fails:

“Less than three trades are involved.”

There is no legal basis for a three-trade rule as a ceiling. The industry guideline treats three trades as a floor for when a GC is presumptively needed, not a cap. The actual standard is whether a GC is reasonably likely to be needed — and that can be true with two trades or even one trade if the scope is complex enough to warrant professional management.

“You have not hired a general contractor yet.”

O&P is based on reasonable likelihood, not actual hiring. The insurance company owes the cost of repair regardless of whether you have already engaged a contractor. You are not required to hire someone before the carrier will acknowledge what the repairs actually cost. Multiple courts — Mee, Tritschler, Mazzocki, Windridge— have rejected this argument directly.

“We will add it when you show us a GC invoice.”

Replacement cost means what it would cost to repair the property, not what you actually spent. The carrier cannot condition payment on proof of expenditure for purposes of determining the scope and cost of covered repairs. You are entitled to know what the repairs cost so you can make informed decisions — including whether to hire a GC, which GC to hire, and how to budget the project. You should not need to hire and sign with a contractor before the insurance company pays what the repair actually costs.

“The homeowner can coordinate the trades themselves.”

The policy pays for what it costs to repair the property, not for the homeowner to become a project manager. The insured is entitled to have the work done professionally. That is what replacement cost means.

“It is included in our line item pricing.”

This is factually wrong. Xactimate's documentation explicitly states that general contractor overhead and profit are not included in line item pricing. Line items reflect subcontractor costs — labor and materials for the trade performing the work. The GC's markup is separate. If the carrier disagrees, ask them to cite the specific Xactimate documentation that supports their position. They will not be able to.

“The scope is too small for a general contractor.”

Small scope does not automatically mean no GC is needed. A “small” water loss that involves demolition, drying, plumbing repair, drywall replacement, texture matching, painting, and baseboard installation involves seven separate operations. Even “small” water losses often involve demo, drying, plumbing, drywall, texture, paint, flooring, and baseboard. Most homeowners are not equipped to manage that, regardless of the dollar amount. The question is not how big the claim is — it is whether the work requires professional coordination.

“We only pay O&P on large losses.”

There is no dollar threshold in any state's insurance code or regulations that limits O&P to large claims. A $15,000 repair that involves four trades needs a general contractor just as much as a $150,000 repair. The complexity of coordination does not correlate neatly with the total dollar amount. Carriers use this argument to suppress O&P on the medium-sized claims where most homeowners will not push back.

How O&P Is Calculated

The math is simple but often misunderstood. O&P is applied to the net direct costs of repair — the total of all line items before tax and O&P. Here is how it works on a $50,000 estimate:

• Direct repair costs (all line items): $50,000
• 10% Overhead: $5,000
• 10% Profit (applied to direct costs + overhead): $5,500
• Total with O&P: $60,500

Note that in Xactimate, profit is calculated on the base plus overhead — so the combined effect is slightly more than a flat 20%. On a $50,000 estimate, O&P adds $10,500, not $10,000. This is the mathematically correct application and it is how the software calculates it by default.

Some carriers will argue for a flat 20% (profit on base only, not on base plus overhead). While the difference is small, it is still an underpayment. The standard Xactimate methodology applies profit after overhead has been added. If the carrier is using Xactimate to write the estimate, they should follow the software's own calculation method.

O&P on Supplements

When additional damage is discovered during repairs and a supplement is filed, O&P should be included on the supplemental amount as well. The same logic applies: if a GC is managing the overall project, their overhead and profit apply to the entire scope of work, including anything discovered after demolition begins.

Carriers sometimes agree to O&P on the initial estimate but refuse it on supplements. This makes no sense. If the project warrants a GC, it warrants a GC for the whole project — not just the first phase. The GC does not stop charging overhead because additional work was discovered mid-project.

Watch for this tactic: the carrier approves O&P on the original $40,000 estimate, then a $25,000 supplement is filed for hidden damage found behind walls. The carrier pays the supplement amount but strips O&P from it. The homeowner does not notice because the check is still substantial. But $5,000 in O&P just disappeared from the claim. The GC still charges it — the homeowner is just expected to eat the difference.

O&P and Emergency Services

A question that comes up frequently: does O&P apply to mitigation and emergency services? The answer depends on who is performing the work. If the general contractor is coordinating the emergency response as part of the overall project — which is common on larger losses where the GC is brought in early — then yes, their O&P applies to the full scope including emergency work.

If a separate mitigation company handles the emergency work independently (water extraction, board-up, tarping), that work is typically billed directly by the mitigation company at their own rates and does not have GC O&P added on top. However, the repair work that follows the mitigation — even if it is directly related to the same loss event — is a separate scope that does warrant O&P when a GC manages it.

Carriers occasionally try to lump mitigation and repair together and argue that because the mitigation company “already handled” part of the work, fewer trades remain for the repair phase, so no GC is needed. This is flawed logic. Mitigation and repair are different scopes performed at different times for different purposes. The repair scope stands on its own.

California-Specific Considerations

California's Fair Claims Settlement Practices Regulations (10 CCR 2695) require insurers to pay claims based on the actual cost of repair. The underlying statutory measure comes from Cal. Ins. Code § 2051(b), which defines the measure of recovery for either a total or partial loss as:

“the amount it would cost the insured to repair, rebuild, or replace the thing lost or injured less a fair and reasonable deduction for physical depreciation.”

Cal. Ins. Code § 2051(b), as amended by AB 188 (Stats. 2019, ch. 59), effective January 1, 2020. AB 188 (2019) eliminated the prior § 2051(b)(1)/(b)(2) bifurcation between total and partial losses.

That phrase — “the amount which it would cost the insured” — is the key. It does not say the amount the insured actually spent. It does not say the amount the insured could save by acting as their own GC. It says what it would cost. And for most repairs of any complexity, what it would cost includes overhead and profit for a general contractor.

Separately, 10 CCR 2695.7(d) requires an insurer's claim investigation to be thorough, fair, and objective. When a carrier asserts that O&P is not owed without providing a documented, fact-specific basis, that conclusory position is difficult to square with a thorough, fair, and objective investigation under (d).

California also requires insurers under 10 CCR 2695.9(d) to supply a written scope of loss and/or written estimate to the claimant. The regulation contemplates that the insurer's estimate will reflect what is reasonably necessary to restore the property to its pre-loss condition consistent with accepted trade standards. An estimate that systematically excludes a legitimate cost component — one that the carrier's own software treats as separate from line-item pricing — is difficult to reconcile with that obligation.

No California appellate court has yet ruled directly on the three-trade rule or the “reasonably likely” O&P standard. The argument in a California claim anchors in the regulation plus persuasive out-of-state authority from Pennsylvania, Florida, Arizona, Oklahoma, New York, the Seventh Circuit, and the federal courts applying Texas law.

What Xactimate's Own Documentation Says

Xactimate — the software that insurance companies use to generate the very estimates on which they base their payments — explicitly distinguishes between subcontractor overhead and profit (which is embedded in line-item pricing) and general contractor overhead and profit (which is not).

General contractor O&P must be added separately through Xactimate's “Add-Ons” parameters. Xactware's own white paper on overhead and profit states that:

“the decision to use general O&P — and the percentages applied — are the responsibility of those directly involved in the estimating process.”

In other words, even the insurer's own estimating software recognizes that general contractor overhead and profit is a legitimate, separate cost component that should be evaluated and included when the scope of work warrants it. When an insurance company generates an Xactimate estimate with the O&P field left at zero on a multi-trade loss, it is not following its own tool's documentation.

Download Xactware’s Overhead and Profit White Paper (PDF).

When O&P Disputes Go to Appraisal

If you cannot resolve the O&P dispute through negotiation, it becomes a dispute over the “amount of loss” — which means it can be submitted to the appraisal process under most California property policies. In appraisal, your appraiser and the carrier's appraiser each prepare their own estimate. If they disagree, an umpire breaks the tie.

O&P disputes are excellent candidates for appraisal because they are straightforward factual questions: does this scope require a general contractor? The answer is almost always yes on multi-trade claims. Appraisers and umpires who work in the construction industry understand this. They include O&P routinely because that is how construction pricing actually works.

One caveat: some carriers argue that O&P is a “coverage” question rather than an “amount” question, and therefore outside the scope of appraisal. This argument is weak. O&P is not a separate coverage — it is a component of the cost to repair, which is exactly what appraisal is designed to determine. Most umpires reject this objection.

What to Do If Your Insurer Denies Overhead and Profit

If your insurance company has denied or withheld overhead and profit on a claim involving multiple trades, here are concrete steps you might consider:

1. Review your policy language.The first question is whether your policy contains explicit language restricting O&P — the type of provision at issue in Kurach. Most standard homeowner's policies do not. If your policy is silent on O&P, the majority-rule framework applies: O&P is owed when a general contractor is reasonably likely to be needed.
2. Request the carrier's basis in writing.Ask them to provide a written explanation of why O&P was excluded, including any regulation, statute, or policy language they are relying on. Most of the time, they will cite the three-trade rule — which gives you an easy rebuttal because it has no legal authority as a ceiling on recovery.
3. Reference Xactimate's own documentation.The software the carrier used to write your estimate explicitly states that line item pricing does not include general contractor O&P. Their tool contradicts their position.
4. Document the trades required.List every distinct trade that the repair requires. If the list includes three or more — roofing, electrical, plumbing, drywall, painting, flooring, HVAC, cabinetry, tile work — that is strong evidence under the Mee framework that a general contractor is reasonably necessary.
5. Request the Xactimate file.Ask your insurer for the native .ESX file of its estimate. This file will show whether the adjuster included O&P in the parameters. If the adjuster set O&P to zero on a multi-trade loss, that is a fact worth documenting.
6. Get a contractor's estimate.Obtain one or more written estimates from licensed general contractors. If every contractor who bids the job includes overhead and profit, that is powerful evidence that O&P is a real cost of the repair. Virtually every legitimate contractor will include it.
7. Count the trades in the carrier's own estimate. Carriers often strip O&P from estimates that contain four, five, or six trades in their own scope. Point out the inconsistency. If they list plumbing, drywall, paint, flooring, and electrical in their own scope but exclude O&P, their position contradicts itself.
8. File a complaint with the California Department of Insurance. Under 10 CCR 2695.7, the carrier must pay claims based on the reasonable cost of repair. If they are systematically excluding a legitimate component of repair cost without legal justification, that is an unfair claims practice. A CDI complaint puts it on the record.
9. Consult a Public Adjuster or attorney.A licensed Public Adjuster can write a proper Xactimate estimate that includes O&P with documentation supporting why it is owed. If the dispute cannot be resolved through negotiation, it can be taken to appraisal where an independent appraiser and umpire make the final determination. O&P disputes can involve significant amounts of money — 20% of the entire repair estimate. A qualified professional can evaluate your specific situation, review your policy language, and determine the best path forward.
10. Do not accept “we will supplement later.” Carriers sometimes say they will add O&P once you start repairs or once you prove you hired a GC. This is a delay tactic. You are entitled to a complete estimate up front so you can make informed decisions about your repairs.

The Math Matters — And So Does the Scale

To understand why carriers fight so hard on O&P, consider the scale. If a carrier handles 10,000 property claims per year in California and denies O&P on half of them, and the average suppressed O&P amount is $8,000, that is $40 million in claims costs they have avoided paying. Per year. For one carrier.

This is not about whether your specific roof repair “really needs” a general contractor. It is a business decision by the carrier to systematically exclude a legitimate cost component from estimates and bet that most policyholders will not fight it. The ones who do fight get paid. The ones who do not save the carrier money.

Do not be the one who does not fight.

Related Resources

• Xactimate Estimates: What You Need to Know — how the estimating software works and where carrier estimates go wrong
• Supplemental Claims — filing for additional damage discovered during repairs
• California Fair Claims Settlement Practices Regulations — every rule your insurer must follow on a property claim
• Your Right to Claim Documents — what the carrier must provide when you ask
• Hiring a Public Adjuster — when it makes sense and how the process works
• The Appraisal Process — the contractual mechanism for resolving amount-of-loss disputes
• Insurance Bad Faith — the implied covenant of good faith and fair dealing in California insurance law
• The Reasonable Expectations Doctrine — judicial construct for interpreting ambiguous policy language in favor of the insured

Cases Cited

• Gilderman v. State Farm Insurance Co., 649 A.2d 941 (Pa. Super. 1994). Justia
• Mee v. Safeco Insurance Co. of America, 908 A.2d 344 (Pa. Super. 2006). CourtListener | FindLaw | Justia
• Trinidad v. Florida Peninsula Insurance Co., 121 So. 3d 433 (Fla. 2013). FindLaw
• Tritschler v. Allstate Insurance Co., 213 Ariz. 505, 144 P.3d 519 (Ariz. Ct. App. 2006). FindLaw
• Ghoman v. New Hampshire Insurance Co., 159 F. Supp. 2d 928 (N.D. Tex. 2001). Justia
• Burgess v. Farmers Insurance Co., 151 P.3d 92, 2006 OK 66 (Okla. 2006). Justia
• Mazzocki v. State Farm Fire & Cas. Corp., 1 A.D.3d 9, 766 N.Y.S.2d 719 (N.Y. App. Div., 3d Dept. 2003). Merlin Law Group analysis
• Windridge of Naperville Condo. Ass’n v. Philadelphia Indemnity Ins. Co., 932 F.3d 1035 (7th Cir. 2019). Justia
• Kurach v. Truck Insurance Exchange, 235 A.3d 1106 (Pa. 2020). Justia

Statutory and Regulatory Authority

• Cal. Ins. Code § 2051(b), as amended by AB 188 (Stats. 2019, ch. 59), eff. Jan. 1, 2020 (measure of recovery for total or partial loss).
• 10 CCR § 2695.7(d) (thorough, fair, and objective investigation).
• 10 CCR § 2695.9(d) (written scope of loss and/or written estimate). Cornell LII
• Texas Department of Insurance, Commissioner’s Bulletin B-0045-98 (June 12, 1998). TDI
• Colorado Division of Insurance, DORA Bulletin B-5.1 (1998).
• Tenn. Code Ann. § 62-6-102(3)(A) (contractor licensing threshold at $25,000).
• Matthiesen, Wickert & Lehrer, General Contractor Overhead and Profit Payments Chart (50-state survey). PDF

Additional Resources

• Xactware Solutions, Inc., Overhead and Profit White Paper. PDF
• Larry Bache, “When Is a Policyholder Entitled to Overhead and Profit?” Property Insurance Coverage Law Blog (Oct. 2012). Link
• Daniel Ballard, “A Refresher on Overhead and Profit in Pennsylvania: Mee v. Safeco,” Property Insurance Coverage Law Blog (Mar. 2021). Link
• Corey Harris, “Payment of Overhead and Profit,” Property Insurance Coverage Law Blog (Mar. 2014). Link
• Merlin Law Group, “Withholding Overhead and Profit” (white paper). PDF
• Kelly Kubiak, “Overhead and Profit” (video), Merlin Law Group (Jan. 2014). YouTube
• Wheeler, DiUlio & Barnabei, “When To Pay Overhead and Profit” (July 2018). Link
• Adjusters International, “Overhead and Profit: Its Place in a Property Insurance Claim.” Link
• United Policyholders, “Payment of Overhead and Profit.” Link
• MWL Law, “General Contractor Overhead and Profit in First-Party Claims.” Link
• Carlton Fields, “In Overhead and Profit Class Actions, The Third Trade’s No Longer The Charm.” Link

This article is for informational purposes only and does not constitute legal advice. Insurance policies and applicable law vary by state and by policy form. Consult with a licensed professional regarding your specific situation.

Written by Leland Coontz III, Licensed Public Adjuster, CA License #2B53445.