Last week we talked about how we bought our first FLIP! As we prepare to close, and get started on the house, I am working on making sure our insurance policies are all lined up. Two policies we are looking to obtain are a (1) Builder’s Risk Policy, and a (2) General Liability Policy.
So, as we do, let’s talk Real Estate, let’s talk I AM FLIPPING A PROPERTY – WHAT TYPE OF INSURANCE DO I NEED? …
As I started to look into this I honestly had NO CLUE what types of insurance policies we may need, so I took some advice from a few lenders as well as Biggerpockets to come up with our final policies…
Now, I want to note that this insurance advice is DIFFERENT FOR EVERYONE based on their current situation. The number of houses you work on at any given time, the location in which you invest, your personal real estate experience, the amount of coverage you are looking for, where you plan to store your materials, etc. – these ALL play a BIG role in determining the insurance policy and quote you may get.
As of right now, PK and I are looking to flip ONE house at a time in Philadelphia. We want to make sure we insure the amount we purchased the property for AND the cost of any materials we use for the renovation.
I mentioned above that in our case, we are looking to obtain a builder’s risk policy and a general liability policy – let’s talk a bit more about what those are….
SO, WHAT IS A BUILDER’S RISK POLICY?
A builder’s risk policy protects the owner / investor from crazy accidents such as an explosion, fire, bad weather, vandalism, etc. Builder’s risk policies are typically good for longer renovation projects, and protect the property and materials. You can also add an “installation floater” which will protect the materials for the house while they are in transit. Builder’s risk policies do NOT protect you from anything related to the contractors.
This is where general liability policies come in…
QUICK SIDE NOTE : A builder’s risk policy will ONLY cover you during the renovation phase of the project. Once you are granted a certificate of occupancy by the city, and start to market the home for sale, you will need to look into switching over to a dwelling policy of some nature. If you do not, and continue to hold on to your builder’s risk policy, there are some items in this policy that will no longer be covered; i.e. theft and vandalism. This is why it is important to make sure you periodically check in with your insurance agent throughout the project to ensure you are properly covered.
WHAT IS A GENERAL LIABILITY POLICY?
A general liability policy will protect the investor from any potential lawsuits resulting from the work done on the house. This insurance should help cover you in the event of claims due to property damage, bodily injury, personal injury and issues that can arise during the renovation project. From what I can tell, it is pertinent to have AT LEAST $1MM in general liability coverage. As the property owner, your liability coverage should serve as the third line of defense behind the (1st line) sub-contractor’s insurance policies AND (2nd line) general contractor’s insurance policies.
Now, we mentioned that the insurance needs can change throughout the various stages of renovation so it is important to note that there are a couple of other types of common “investor-related” insurance policies out there…
WHAT ARE SOME OTHER INSURANCE POLICIES ONE MIGHT CONSIDER WHEN FLIPPING A PROPERTY?
Vacant Building Policy
Vacant building policies are intended for vacant properties! They can be used for “smaller” remodel projects in which you may be doing purely cosmetic updates over a short time period, OR just as a placeholder in between tenants. Once a tenant moves in, the policy can easily be switched over to a dwelling policy. Let’s talk about that below…
Dwelling insurance is used to simply cover the structure aka dwelling. Unlike a homeowner’s insurance policy, it does not cover the possessions inside the property. Investors typically use dwelling policies to insure the structure, but nothing inside, as that can be seen as the tenant’s responsibility under their renters insurance.
WHAT ELSE DO I NEED TO DO TO MAKE SURE I AM COVERED?
Here is some advice I have received…
When working with your General Contractor (GC) : Request a copy of your GC’s General Liability Policy. Most investors are recommending that your GC carries AT LEAST $5MM worth of coverage, OR $1MM per occurrence and general aggregate limit. Make sure you are added to their policy as well. It WILL NOT cost them ANY MONEY to add you. Once your GC has added you to their insurance policy, request a copy of the Certificate of Insurance (COI) from the insurance company. Also add yourself to the list of people who are notified in the event that anything in the policy changes.
When working with the Sub-contractors : Request a copy of all sub-contractors insurance policies. They should carry liability insurance, workman’s compensation insurance, and have a current contractor’s license. All of the sub-contractors you work with should also add the GC to their “additional insured” list. Request a copy of their COI from the insurance company AFTER they have added you and the GC to their insured list. Again, this SHOULD NOT cost them anything extra to do.
WHERE AM I FINDING THESE POLICIES?
I have been working with a couple of different insurance brokers to get a general sense of quotes, ranges, coverage options, etc. Will let you know who we ultimately end up working with!
HOW MUCH CAN I EXPECT TO PAY FOR THESE POLICIES?
A few quotes I have received so far…
Builders Risk : anywhere from $650 (only covers renovation for 6 months) – $3,100 (covers renovation + property for 12 months)
General Liability : ~$1,100 – $1,200 for 12 months
For all the experienced flippers out there – is this “normal”?! Are there any ADDITIONAL insurance policies I should be looking into?!
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ME! – this week’s post is based on my personal experience and findings