The KM Insurance Real Estate Coverage Guide
Part 2: Flippers
By Parker Cox
Disclaimer – The information contained in this writing is not guaranteed to be accurate. The information provided is general in nature, broad in scope, attributed solely to its individual author’s personal understanding, and cannot be relied upon to substitute for specialized consultation or legal advice pertaining to any particular situation or type of situation. We urge you to consult your own agents and attorneys in determining what is best for your particular needs and interests.
Flippers:
“The Flipper’s Policy” is a variation of the standard commercial package policy, a combined package of Property Coverage and Liability Coverage that is specifically designed to allow unlimited vacancy as well as a full scope of rehab (though not a tear down and rebuild).
This is a unique risk, because it is a property that is vacant for an unknown amount of time with an uncertain amount of work to be done to complete the project.
Property Coverage—the structure and outbuilding—“If you flipped the house upside down and shook it, all the stuff that would NOT fall out.” That includes your cabinets, sinks, tubs, floors, walls, decks, electrical, plumbing…etc.
Property Coverage premium price and value is based on the replacement cost (cost to rebuild) of the property, NOT the price you paid or what you will sell it for.
Contents Coverage—for personal property – “the stuff that would fall out if you flipped the property over and shook it” i.e. equipment, the fridge, furniture…etc. In most cases, the base flipper policy does NOT include (but can have added) what is called “Contents Coverage”.
Liability Coverage—(almost) always offered at a limit of $1million/$2million.
This means $1million of coverage per occurrence and $2million of coverage total for the policy period, no matter how many occurrences. It can be raised to $2million/$4million, or an Umbrella can be added for the amount of coverage you desire.
Notes on a Flipper’s Policy:
This policy does NOT cover your contractor! You will want/need proof (and a copy of that proof) that your contractor is properly licensed and insured. BUT, if it is a small job and you are not using a GC or other contractor, you can add an endorsement that allows you to be what’s called an “owner-builder.”
Like other insurance, flippers’ policies normally (but ask your insurance agent about your specific policy details) provide coverage for Fire, Theft, Vandalism, Wind/Storm Damage but they will NOT protect against Earthquake or Flood, nuclear war, volcanic events and more, which require separate policies.
Mortgagees will want to be added to the policy as the “loss-payee,” which means if the property burns down and your policy pays, they get paid back, not you.
The Policy Structure – In my experience, instead of one policy per property, which leads to more paperwork and higher cost for you as an investor, look for a company that offers a single master policy that allows you to add and remove your various properties as you buy and sell them, which is easier and less costly too.
Premiums are almost always offered on an annual basis, so $1,200/year = $100/month. And as flippers, doing a 3-month project, there is a significant difference between budgeting for $300 on insurance and $1,200 for insurance.
Most policies do require at least 25% to be paid, meaning you will pay for a minimum of 3 months of coverage or 25% of the policy period if it is not 3 months.
Make sure your policy is “Pro-Rated,” which means that you only pay for the coverage for the periods in which you own the property.
Pro-rating to the day is far superior. It means you pay only up to the day you sell the property.
Pro-rating for the month means even if you are only a day into your 4th month when the property is sold, you will still pay for the entire month.
Find a good agent, build a good relationship by including him or her in your business and projects so they can learn about and understand what you are doing to find the best coverage for your needs. It is important that they can access the brokers and carriers that can provide the protection you require. Most importantly, make sure you’ve found someone who will bend over backwards for you every single day and jump through hoops of fire in a pinch. At KM Insurance, we’re here to do just that. We know REI. Give us a call at (619) 667-2880, and we’ll get you covered.
