Insurance for flips when partnering(not contracting) with a contractor

[Vidit S.]

Hi all - I hope this doesn’t come across as a low-effort question. I’ve done a decent amount of research this week, but I keep getting conflicting answers from different insurance agents. I’m posting here to gather more data points (even anecdotal ones) to help me get closer to the right answer.

My partner (Joe) and I are doing our first flip in Minnesota on a single-family home. We've brought on a contractor friend (Mike) as a third partner, and we've set up an LLC (XYZ LLC) for the project. Joe and I put up the cash to buy the property (around $300K), and Mike is contributing half the rehab costs while we cover the other half. Mike will also handle the flip from start to finish by coordinating subcontractors through his company, ABC Construction LLC.

The plan is to split profits after the sale, and if this works out, we’re hoping to do more flips together in the future.

Now, here’s where I’m stuck—insurance. After researching online and speaking with a few agents, I’ve narrowed it down to three main types of insurance that might be needed:

1. Dwelling
2. Builder’s Risk
3. Liability

The issue is that I’m getting mixed advice:

• Some agents say we don’t need Builder’s Risk for a flip, while others insist we do.
• Some say XYZ LLC needs its own liability insurance even though Mike's company, ABC Construction LLC, already has liability insurance (and will be contracting with the subs). Others say XYZ LLC doesn't need liability coverage at all. Some said we can be additional insured on the contractor's insurance.

If anyone has experience with a similar setup or insights into what insurance is truly necessary for a situation like this, I’d really appreciate your advice. I need to move relatively quickly, so any recommendations would be super helpful.

Few more pointers that might help:

1. 6 months = Timeline
2. Rehab work scope = changing from 3 bed and 1 bath to 4 2.5 bath
3. ABC will contract directly with subcontractors
4. XYZ LLC might do another 1 or 2 flips and then we will start another LLC. to not have too much equity in 1 llc

Thanks in advance

[James Hamling]

@Vidit S. keep this in mind, the regulating body is really the only opinion that matters. 

If I understand correctly you have the joint LLC, doing the contracting. That means that LLC has to be licensed and insured as a contractor.

Instead, if looking for simple, you'd have that LLC sign a contract with the contractor, just like any normal customer does, hiring that GC for the work.

And if smart, would make it open book accounting and can even make it a net-0 agreement for payment. Because the profit compensation is from his membership in the joint llc also. 

Your GC should know this that there is 2 licenses in MN for GC's. First the person has to have there license as a qualifying person/builder. Than the company is the actual licensed contractor. 

It's not a singular thing, it is 2 parts, the person and the business. 

So what your trying to do here is in fact illegal contracting business. Even though you have the qualifying person in it, the company itself does not hold a GC license and is not insured for such. 

So save yourself the headache, split it up, sign like a client and use terms language of the client contract to get it done. Than the LLC is just the owner, not a GC.