Insuring Your Flip
Risk Management Considerations During the Fix and Flip
by Shawn Woedl
While high housing prices and increased cost of materials has led to a drop in house flipping in the first quarter of 2021, it is still expected to be a profitable venture. Though purchase prices are high, the aggressive market also means buyers will be lined up when the flip is complete. Plus, distressed inventory is expected to surge as mortgage forbearance is lifted. With more skin in the game for either the buyer or the lender, it is increasingly important that flippers have the proper insurance in place to protect their investment asset.
What type of coverage do you need?
As a baseline, you would likely want to carry dwelling insurance and premises liability. Your property insurance would cover physical damage to the property caused by the perils covered under your policy. The perils that are covered will vary based on the coverage form you purchase, the two most commonly available being Basic and Special.
Basic form covers such things as fire, storms, smoke, explosion, and vandalism. The causes of loss that are covered are listed on the policy. Special form coverage is the most comprehensive coverage form as it covers anything that is not listed as an exclusion in the policy. Of note, Basic form coverage does not include Water Damage or Theft. Because a property under renovation is likely vacant, it can be ripe for thieves looking to acquire newly installed appliances, pipes, or building materials. And water damage caused by a burst pipe may sit for days before it is discovered.
The specific type of coverage you need may depend on the complexity of the work being done. Major structural renovations have different needs than mostly cosmetic updates. But a standard homeowners policy is not the right fit, nor is a “landlord” policy. These types of policies require the property to be lived in—homeowners usually requires that the occupant be the property owner (or the insured). If the owner files a claim on a vacant flip property under renovation that carries a landlord policy, the insurer can deny the claim for being uninhabited.
If you are simply doing cosmetic or simple updates, a vacant property policy may suffice. Be sure that your agent knows that the property is being renovated. For larger projects, you will want to consider a Builder’s Risk policy. This coverage can extend to any materials on site that you own but does not cover the tools or equipment of any contractors that are left on site.
When you purchase your property insurance, choose your property coverage amount that is equal to the purchase price of the property PLUS the renovation budget. If a property loss occurs midway through the project, keep in mind that the loss settlement cannot exceed your invested capital at the time of loss, which may be less than your total coverage limit. This is to ensure that you are not profiting from insurance. Keep any receipts for purchases you make along the way to submit as part of the claim.
Your premises liability (or general liability) can protect you legally if a third party is injured while on the property. Vacant properties are magnets for explorers, and you could be held liable if someone who wanders onto the property is injured on the premises. Ideally, your liability limit starts at $1 million per occurrence. Keep in mind – premises liability does NOT extend to injury of someone you have hired to work on the project and be on site. Nor will it cover poor workmanship or negligence after the project is complete if you do the work yourself.
What about your General Contractor?
If you are doing a flip large enough to require a general contractor (GC), always hire someone who is properly licensed to complete the work for which you hired them. The licensing requirements are specific to the state. Your GC (and any subcontractors) should carry their own liability insurance to cover their business operations and their employees, including Contractor’s General Liability and Workers Compensation (if they have employees). Contractors Liability covers damage to your property for which the contractor may be responsible as well as coverage for Products and Completed Operations, ensuring that the GC is liable for any negligence in workmanship that leads to a lawsuit.
When you hire a GC to work on your project, you should require them to add you (whatever entity that owns the property) as an additional insured on their liability coverage. This does two things: First, it extends coverage to you if you are named in a lawsuit caused by their negligence. Let’s say your contractor cuts corners when installing a staircase railing. After you have placed a tenant, the handrail breaks causing your tenant to fall. This type of liability claim would be picked up by your general contractor’s liability coverage and not your premises liability, protecting your loss history and future insurance costs. Second, if you are listed on the policy, you will be notified if the coverage lapses or is cancelled while the project is still active.
If you own the property and doing the renovation work yourself, your premises liability protection does not extend to your actions and work while performing the contractor’s role. More specifically, you would need to purchase the contractor’s general liability coverages listed above AND premises liability coverage for incidents that are not connected to the project. To obtain this coverage, you will need to obtain the proper licensing as required by your state. Insurers are leery of covering flippers for fear of cutting corners to save a buck, so it may be tricky or costly to obtain this coverage as a flipper. You will still want to hire licensed and insured subcontractors for more specialized services like electrical, plumbing, foundation and structural work.
Ways to mitigate risk at your flip
Maintaining a safe project site and taking some basic security measures can help mitigate the risk of claims at your property. Avoid liability incidents by keeping the site tidy and free of hazards. If you have a crew working at the site, be sure they are staying hydrated, taking breaks when needed for exhaustion or overheating, and being careful when lifting heavy objects or performing repetitive motions.
Take extra steps to be sure the site keeps out unwanted visitors. Doors and windows should be securely locked to help avoid theft. You may even take some additional measures by installing a security system and/or motion sensing outdoor lights.
Ensure that any property is armed with working smoke detectors, even if the property is uninhabited. Some insurers may deny a fire claim if it is discovered that smoke detectors were not present.
Other variables to consider when selecting a property to flip
If you intend to purchase a distressed property to flip, keep in mind some variables that can affect your ability to purchase coverage, the cost of coverage, and what may affect you in the event of a claim.
Knob-and-tube or unremediated aluminum wiring may pose challenges in obtaining coverage (many insurers will not insure a house with these types of wiring). You may be required to repair or replace the electrical wiring.
Always work with an insurance agent who has experience working with flippers, discuss your project with your agent and keep them up to date on progress or changes. If you increase the budget, let your agent know so you can increase your coverage amount. The coverage needed during the renovation project is different than the coverage needed once the work is done, and the property is sitting vacant while being marketed to tenants or on the market for sale. The coverage needs to change again when a tenant is placed.
Many traditional insurers will require you to purchase a new policy (often with annual
terms and a minimum premium amount) each time the status of your property changes. There are programs built that make this process much easier to manage with monthly payments and ease of changes.
