The title of this blog is a quote by Chip Merlin after we discussed some of the issues that have been popping up in my continued review of the Farmers “Next Gen” policy. During this review, I realized this policy is really the gift that keeps on giving—that is, if you are the carrier. Hidden throughout the policy are changes, some major, some more subtle, that make the policy extremely carrier friendly and, in my opinion, anti-consumer in order to pay less on claims.

One such change is the below clause that deals with the payment of overhead and profit:

e. General contractor fees and charges will only be included in the estimated reasonable replacement costs if it is reasonably likely that the services of a general contractor will be required to manage, supervise and coordinate the repairs. However, 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, unless the law of your state requires that such fees and charges be paid with the actual cash value settlement.

I see two major issues with this clause. First, and perhaps most obvious, is the language that makes the decision to pay overhead and profit subjective. While the traditional view is that overhead and profit will be paid if three or more trades are involved in the repair, this policy states that overhead and profit will only be paid “if it is reasonably likely that the services of a general contractor will be required  to manage, supervise and coordinate the repairs” (emphasis added). The insurance carrier will be the one to determine if a general contractor is necessary regardless of the number of trades or complexity of the work to be performed. I can only imagine the fights this will cause.

The second major problem with this clause: overhead and profit is only paid once incurred by the insured. Making overhead and profit an incurred coverage item can put a huge burden on an insured that may not have the means to front the expense. Imagine a homeowner has a fire that destroys their home. The replacement cost of the home is $200,000 and after overhead and profit is added the total rebuild cost is then $240,000. However, the home is older and the insurance carrier depreciates the home by $50,000 making an actual cash value payment of $150,000. In that instance, Farmers would write a check for $150,000 for a $240,000 loss. The insured can’t make a claim for the recoverable depreciation or overhead and profit until those costs are incurred. The insured would have to front $90,000 to secure full indemnification under the policy.

Finally, it should be noted that the policy form this clause was taken from is the one used by Farmers in Pennsylvania. I wonder why this provision is even in the policy as it states that overhead and profit will only be paid when incurred, “unless the law of your state requires that such fees and charges be paid with the actual cash value settlement.” As my learned colleague, Larry Bache, wrote in October, 2012, Pennsylvania law requires overhead and profit to be paid as part of the actual cash value payment. However, after conversations with some folks working claims in Pennsylvania, that does not seem to be how the claims are being administered.

If you have been following this series, you may be noticing a trend, the policy seems to have a lot more words and a lot less coverage. Reading it, I feel like I am entering the Twilight Zone.

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