Builders Risk Insurance for flipping a house

I am flipping a house, what type of insurance do I need?

The opportunity to make a return on investment in today’s housing market has increased the activity for real estate investments on the residential market.  We often are asked to insure these projects.  Here is a short explanation of the risks and some methods of protecting your investment.

Scenario:

John Doe is buying a bank owned 1,500 square foot home for $50,000.  His plan is to invest $40,000 to complete the home and sell it for $90 per sq ft at $135,000 at a potential gross profit of $45,000.   The property is owned by John Doe Investments, LLC.  John has a couple part time people helping him with clean-up, demolition, landscaping, etc.  The majority of the work is subbed out.

Common Risks:

·         Damage to your structure from fire, wind, flood, earthquake, etc.

·         Theft of building materials

·         Bodily injury to visitors, prospective buyers, real estate agents and subcontractors, etc.

·         Property damage to above, neighbors’ property, etc.

·         Bodily injury to employees working for you.

Common Risk Management Techniques:

Risk Transfer: 

Utilizing subcontractors in performing the improvements to the home; electrical, HVAC, roofing, etc.  Make sure you get a Certificate of Insurance showing adequate limits of liability and Workers Compensation.  Always get the Certificate directly from the insurance agency of the subs and always before work starts.

Risk Financing:

Property Coverage: A Builders Risk Policy covers the project during construction phase and protects the investor from losses due to fire, wind, hail, etc.  Most forms will exclude theft and vandalisms but can be added via endorsement. 

Liability: The liability for the premises can be purchased separately that covers bodily injury and property damage to others arising out of the negligence of the contractor/investor.  Typically there is no products liability coverage for the improvements and workmanship of the home.  The contractor can protect his/her company from uninsured subcontractor’s liability by carrying a separate liability policy for the general contractor’s duties.

Workers Compensation:  Even if the general contractor does not have any employees, he/she is still liable for injuries to the subcontractors unless this is transferred to their own insurance policy (see above for Risk Transfer).  If the GC picks up casual labor even for one day and that person is injured on the job, the GC is responsible.  Having a workers compensation policy in place for the GC regardless if employees are used protects both from casual labor as well as the possibility the insured sub ends up being an uninsured sub due to failure to pay premium, etc.

Jacob E. Dahlin CIC, CLCS, CBIA, CWCA is a Commercial Lines and Risk Management Specialist at Mountcastle Insurance Agency in Winston-Salem, NC.  He can be reached at jdahlin@mountcastleinsurance.