When reviewing a Farmers homeowners insurance policy, understanding how overhead and profit are managed is crucial for homeowners. Often overlooked, these terms play a significant role in determining how much you will ultimately receive during a claim, especially when it comes to repairs following a disaster like a fire or other significant damage.
If you’ve ever been confused about how your insurance premiums are calculated or why there’s a difference in the way overhead and profit are treated during claims, you’re not alone. This article will help clarify these concepts, so you can make informed decisions about your coverage and claims process.
How Farmers Handles Overhead and Profit
Farmers homeowners insurance policies include a clause about overhead and profit that can sometimes surprise policyholders. In a typical homeowners policy, when a loss occurs and repairs are necessary, overhead and profit are usually considered part of the replacement cost. However, Farmers limits these payments and states that overhead and profit are only included if it is “reasonably likely” that a general contractor will be needed for repairs. This wording introduces subjectivity into the claims process. Whether a general contractor is needed or not is determined by the insurance carrier, even if multiple trades are involved. This leaves a lot of room for insurance companies to lower the overhead and profit amounts they payout.
For example, if you experience a fire that causes significant damage to your home, your replacement cost might be $200,000. However, after depreciation is applied, your actual cash value (ACV) settlement could be $150,000, leaving you with a gap. Overhead and profit could increase the total cost to $240,000, but you would not be paid for that until you’ve actually incurred the costs for repairs. This means you’d need to front significant out-of-pocket expenses to proceed with the work and only receive reimbursement later, assuming you meet the necessary conditions set by Farmers.
The Burden of Upfront Costs
One of the biggest challenges with the way Farmers handles overhead and profit is the requirement for homeowners to pay for these costs upfront. Let’s say your home’s total replacement cost (including overhead and profit) comes to $240,000, but your ACV payout is only $150,000 due to depreciation.
The remaining recoverable depreciation and overhead and profit won’t be paid out until you’ve spent money on the repairs. For many homeowners, this is a significant financial burden. You might be expected to come up with an additional $90,000 for the repairs to receive full indemnification, which can be incredibly difficult, especially if you’re already facing financial hardship after a loss.
This situation isn’t just frustrating for homeowners; it creates unnecessary delays in the claims process. It also raises questions about whether Farmers is truly providing full indemnification or merely adjusting the claim to suit their own financial interests.
Many policyholders don’t realize the impact of these clauses until they’re in the midst of a claim and already facing significant expenses. Understanding these details in advance can help you plan for the financial burden that may come with repairing your home.
The Discrepancy Between Premiums and Claims Adjustments
What many people don’t realize is that Farmers calculates overhead and profit differently when setting premiums compared to when it processes a claim. During the premium calculation, Farmers might charge up to 25% for overhead and profit as part of the replacement cost.
However, when it comes to actually paying out a claim, the insurance carrier often applies a much lower percentage, typically around 20%. This discrepancy creates confusion among homeowners who are paying premiums based on higher overhead and profit amounts but then receive lower payouts for the same coverage.
This difference is something many policyholders don’t notice until it’s time to file a claim. Homeowners who’ve been paying for overhead and profit at the time of underwriting might be surprised to find that they aren’t receiving a comparable payout during the claims process. It’s a situation that can cause frustration and distrust in the insurance company.
The question many homeowners ask is why the insurance company charges so much more for overhead and profit during premium calculation, yet only pays a fraction of that amount during the claims process.
Aligning with Industry Standards
Another issue lies in the fact that Farmers may not be following industry standards when it comes to overhead and profit. Restoration contractors typically need a profit margin of at least 38% to 42% to stay in business, yet Farmers often uses a much lower percentage when settling claims.
This creates a disconnect between the costs contractors face and what Farmers is willing to pay out. Even major companies in the restoration business, such as Belfor and ServPro, tend to estimate much higher overhead and profit percentages than what is paid out in Farmers claims. While Xactimate estimates may show lower figures, the reality is that contractors need more to cover their overhead and ensure that the repairs are done properly.
When Farmers settles claims, it’s clear that the company is using a different methodology for calculating overhead and profit than what contractors experience on the ground. The result is a significant gap between what’s charged for premiums and what’s paid out during the claims process. This can lead to further tension between homeowners and the insurance company, especially when contractors are asked to work for a percentage of overhead and profit that is not sufficient to cover their actual costs.
Conclusion
In the world of homeowners insurance, the way Farmers handles overhead and profit can be confusing, frustrating, and potentially costly for homeowners. The key issue is the subjective language in the policy, which allows the insurance carrier to determine when and how overhead and profit will be included in a claim.
Additionally, the burden of paying these costs upfront, only to be reimbursed later, can be overwhelming for many homeowners. Furthermore, the discrepancy between the premiums homeowners pay and the amount they receive during claims can lead to confusion and distrust in the insurance company.
Homeowners must carefully review their policy and be aware of how overhead and profit are factored into both their premium and claims process to ensure they are getting the full coverage they’ve paid for.
