By Derek Kartchner | Gila Insurance
Honestly, coverage offered by insurance companies on homes under renovation (Flips) sucks. If we consider it, it makes sense that homes under rehab are problems for insurance companies. Why? Well, usually the first thing that shows up is a dumpster. You know that big sign in front of the house that says this house is likely to be empty but filled with tools and materials in it for the next couple of months? Moreover, in the mind of an underwriter, each vacant home is sure to become a haven for a teenage wingding, a sanctuary for squatters, or a wellspring of copper, cabinets, and appliances for a local thief. Whether the underwriter is right or wrong, the net effect is that coverage is going to be limited. That’s in the best of times, what’s worse is what we expect out of our flip policies because we expect things to be covered that aren’t. Here are several examples that I hear all the time.
- Contractors You Pay To Be On The Property: I often hear the question, “Will my liability coverage cover me if someone gets hurt on the property?” Well maybe. The nosey kid down the street might come into the home uninvited (trespassing) and get hurt, he would likely be covered. You might have someone looking to buy the property once the project is completed. They too would likely be covered. And then you have people you hire to work on your property that could get hurt. THEY ARE NOT COVERED. If you pay someone for a service, you have just agreed to in a business transaction; they are now a contractor or subcontractor. As such, they should be insured and carry workers comp coverage (the coverage that covers someone while they are working). I once heard Robyn Thompson, the Queen of Rehab, explain she only hires adults. Being an adult would mean they would have insurance, not only for the work they provide but for their employees as well. While you don’t have to follow Robyn’s advice, I would say, don’t expect your premise liability to be a work comp policy. It’s expressly excluded. Also, if you are worried about insurance costs, just know that work comp for contractors is crazy high, so it’s easier just to hire adults.
- Your Tools: Maybe you are more of a DIY guy/gal. Cool, me too. I am always willing to try stuff. Flooring is no problem. Drywall, no problem. Matching texture is more of a problem, but I am getting better. DIY not only allows me to save money on labor, but I also get to build my tool collection. Let me paint a scenario and see if it rings true for you. It’s been a day, maybe things have gone your way or maybe they haven’t. Regardless, you’re hungry and tired, and you decide to leave your tools at the project house. Not a problem, but just know that your tools aren’t covered under a flip policy. You see, coverage for tools either comes from your homeowner’s policy or a specialized policy for contractor equipment called inland marine coverage. So, if your stuff disappears, you are toast if you are relying on your flip policy.
- Lots of Stuff You Would Think is Covered: You are insuring a house, right? So, it should be the same as my regular house policy, right? Wrong! How a home is used means A LOT. A standard homeowner’s policy doesn’t cover rental. A rental doesn’t cover a vacant home, and if we are going to start tearing things apart, we have just entered a new realm. Insurance companies build policies based on the risk. In a lot of cases, this means limiting coverage. Remember, they view a vacant house as a problem. I can, and have, spent a lot of time writing about this (www.GilaInsurance.com), but it is important to understand that a Flip policy is different, and you need to understand what it covers, or at least be willing to lean into the surprise when it comes.
Well, that was depressing. Look, an insurance policy built for a flip project is limited. It covers property damage to the home from Fire, Explosion, Hail, Wind, Vandalism, and Malicious Mischief. It does cover when someone gets hurt on the property, as long as they weren’t hired by you to be there. That’s it. Coverage for flips can vary a lot from company to company and from project to project. A paint and flooring project can be insured very differently from a project that adds square footage or changes the home’s structure. Therefore, your best bet is to work with an agent who understands real estate investing and spends the time to understand what your policy covers, so you don’t get surprised by the unknown.