How to resolve liability risk on uninsured rehab property prior to closing

18 Replies

I have a contract to buy a distressed single family house that I plan to rehab and sell. The house is vacant and uninhabitable as is. It sustained water damage from a broken pipe in the kitchen last winter. The insurance company cancelled the homeowner's policy due to the condition. 

I plan to get builders risk insurance after closing. Here is the challenge. I want to kick off the due diligence. But the seller is very concerned about liability issues during my due diligence period (i.e., if someone gets injured on the uninsured property). Has anyone dealt with this before? What options do we have for working around that concern?

A homeowner's policy isn't going to cover the vacant property, and may not cover liability regardless.  So, the fact that the homeowner's policy is not in effect is a moot point. 

If the contractors you have through the house have liability and workers comp insurance, they're already covered.  If not, I would talk to an attorney about writing up an indemnification agreement you can sign for the seller. 

Perhaps others have additional ideas? 

Tell him to buy a liability policy from USLI for $550 if he is that concerned about it. He can get a certificate of insurance from any contractor or inspector that will set foot on the property. You can't buy insurance until you have an insurable interest in the property.

I am confused on how the buyers contractor liability policy would in any way cover the seller?

The seller needs their own liability policy (USLI is a great market for that) until closing. A contractors liability policy only covers the contractor. If additional insured is added for the buyer, the policy only covers the buyer for lawsuits brought against the buyer because of the contractors actions. Meaning the buyer still needs their own liability policy to cover their butt. 

I hear this A LOT from house flippers, my contractor has GL and lists me as additional insured. So what happens when your realtor slips and falls in the house on resale?  I can tell you this, your profit margins will be WAY down after the realtor's work comp carrier is done with you. (The WC carrier will certainly subrogate (go after you) for that claim). 

So find a broker, we're licensed in all 50 states for P&C, get the policy. Great news too, as long as you have an insured contractor, one of the biggest Builders Risk markets in the U.S. will now add on GL. No need for two policies now. 

Originally posted by @Derek Lacy :
I can tell you this, your profit margins will be WAY down after the realtor's work comp carrier is done with you. (The WC carrier will certainly subrogate (go after you) for that claim).

In my experience, there are two type of subrogation -- legal and contractual.  If an agent gets hurt in a house, I don't believe there is any legal standing in (in any state I'm familiar with) for subrogation.  Which means the insurance company could only subrogate in the case of a contractual agreement.  But, I've never read an agency agreement where this is discussed.

Can you be more specific how an insurance company could go after a party to an agency relationship for an injury suffered by an agent?

I'm not saying you're wrong (this is clearly your business, so I imagine you're right), but I'm trying to understand how this risk comes about legally for a buyer/seller so I can better understand other insurance risks I might face...

A Realtor is hurt, they file Work Comp.  The work comp carrier 100% can go after the party at fault.  Yes, a realtor is your agent, but in a principle/agent relationship there is no exclusion to negligence.  You're parsing a simple solution.  What about a prospective buyer slips and falls in your house.  There is a lawsuit right there.

But I would be more worried about a work comp carrier going after you.  They have lawyers on staff just to recover the payment.

Originally posted by @Derek Lacy :

A Realtor is hurt, they file Work Comp.  The work comp carrier 100% can go after the party at fault.  Yes, a realtor is your agent, but in a principle/agent relationship there is no exclusion to negligence.  You're parsing a simple solution.  What about a prospective buyer slips and falls in your house.  There is a lawsuit right there.

Absolutely understand the case where there is negligence on the part of the agent's client.  And certainly if there's a buyer slip/fall, that's a lawsuit in the making. 

But, from my reading, the OP is asking about indemnification of the seller during due diligence, when the only people who should be in the house should be those who are insured against the types of things that would typically be present in a distressed house.

Assuming the OP doesn't bring in anyone who isn't an industry professional, covered by WC and familiar with the risks of distressed property, is there still any significant risk of liability? (And again, not trying to argue, just trying to understand.)


Personally I would be most worried about those covered under work comp. Some one slips and falls, normally it needs to be bigger than a few grand for them to think attorney. Work comp subrogations are coming in at $150 any more. Medical insurance subrogations closer to $750 before you see them. 

Originally posted by @Derek Lacy :

Personally I would be most worried about those covered under work comp. Some one slips and falls, normally it needs to be bigger than a few grand for them to think attorney. Work comp subrogations are coming in at $150 any more. Medical insurance subrogations closer to $750 before you see them. 

I guess I don't understand the purpose of WC...

I was under the impression that the reason contractors contractors carried WC was to cover any injury they sustained during the course of their work.  The purpose of an investor ensuring that a contractor has WC is to protect the investor from a lawsuit or having to come out of pocket should one of his contractors get injured.

If the insurance company can and will come after the investor for reimbursement of WC payouts, what is the benefit to the investor to hire contractors with WC insurance?  

Secondly, if ensuring my contractors have WC doesn't protect me against having to pay for the contractor's injuries, how do I protect myself?

Clearly I'm missing something...any idea what it is?

WC carrier only surrogates if they can demonstrate negligence and there is another insurance policy in line. This happens on large jobs. If an injury occurs in the course of their job then it will stop there. The only time I have had it happen in 16 years was a landscaper that ran his bobcat into some scaffolding causing a injury to a plastering contractor.
Originally posted by @Paul Haughton :

I plan to get builders risk insurance after closing.


You should get an insurance BEFORE closing. Call your agent now and have the policy start the day you take possession (I assume this would be the day of closing). Your lender will probably require it and even if they don't it's simply good policy for you to have it on any property that you own. 

That is the misunderstanding.  

Work comp protects the employer from statutory liability (meaning liability that is written into law), as in you must pay for all worker's injury etc.

The above poster is correct, they must be able to prove negligence on your part.  What's even better is if your state allows a broad form indemnification agreement into a contract you can then turn the work comp claim into a employers' liability claim for that same contractor.  

This is all VERY complex.  

But let's assume you don't have a legal team writing your contracts, then you don't have a broad form indemnification agreement.  

Here's how this goes, the contractor is hurt the work comp pays out.  They will then investigate if there was negligence on the property owner's part, in most states that would be an undisclosed hazard (meaning something you knew about but didn't think to warn the contractor).  If they think there is they will send a demand letter with the threat of legal action.  They will then file suit if the demand is not met and see where it goes.  

This is why the property owner should maintain premise liability at all times during their ownership of the property, and to put it simply, just never act as a GC.  The costs savings compared to risk just do not seem to be there.  

All of this stuff is a major headache.  Did you know if you act as your own GC in California that there is a 10 year period from substantial completion to discovery of a construction defect to file suit (called the statute of repose).  Meaning a fitting in a pipe that was worked on 9.75 years ago bursts, they allege that it was a defect from the plumbing work done under your GC supervision, they can file lawsuit and if they can prove negligence to 6 people that could not get out of jury duty, they win.  If you did the flip in your own name, it's your house that is on the line.  And 9 times out of 10 it is the homeowners insurer that will go after that.  Of course you can always try to turn it around to your plumbing subcontractor if you can find the guy 9.75 years later.

Insurers, to stay competitive, have learned many facinating ways to recover any payment they pay out.  Of 

BTW, this is coming from someone that previously worked in a subrogation department.  Time and money were better on the agent side so I made the move more than a few years back.  But it astounded me everything that was starting to get subrogated by demand of the new VP of claims.  And it made him look like a superstar in the company.  

And no, we did not care if you had insurance or not, we went after it the same.  Heck they were filing subrogation claims against incarcerated individuals who were incarcerated for the burglary that they were being subrogated against.  Meaning, Mr. Burglar you did $15,000 in damages during the burglary you are now serving time for, we are going to win a judgement against you for $15,000.  They did this to get in line just in case some windfall came to that person.  

@Derek Lacy I noticed your response on the other thread and found this interesting posting you made.

So how do you protect yourself from the statue of repose in California? I mean, what if the contractor is long gone 8 years later and a header he installed falls and injures somebody. How does a flipper protect himself for defects after the sale? 

The Worker's Compensation issue is highly state specific.  Just because WC pays for an injury does not mean the insurance company can recover for negligence.  Part of the WC "bargain" scheme is that employees do not have to prove liability to be compensated for injury.  The WC carrier will, however, have to prove negligence.  So it is not enough that someone slips and falls or gets injured.   The carrier seeking to subrogate must show negligence.  For example, was the floor inherently unsafe, etc.  

To address the original posters concern, just draft a release and sign it.  You have two parts to a good release.  The first says, I will not sue you.  Sometimes these don't stand up for a variety of reasons.  So the second part says, I agree to pay you the damages you have to pay me.  That's a contract between you and the other party, and can be enforced many times even if the release is not.  So the language looks something like this:  buyer understands that the property has hazards and may be unsafe.  Buyer assumes all risk and liability, waives any and all claims that may arise out of injury etc.,  Further, buyer agrees to indemnify and  hold seller harmless from any loss or injury occurring on the property.   

This is not a polished or complete waiver, but you get the idea.  You can probably google it and find a good one.  

@Darish D.

That is where insurance and attorneys comes in along with some best practices to reduce risk.  Our office does risk management planning and that is what your question delves into.  For most flippers the cost of doing it to best practices, will be prohibitive.  But it should be known there is risk and a very good reason to look at best practices.  Let me know if you would like a simple risk management brief and we can certainly come up with a plan, but a good way to do it is to use reputable licensed contractors and you will rarely have a problem.  Where it turns bad is when a flipper to save on overhead does the GC work themselves.  That's where you lost almost all defense to it was the GC's fault.

Account Closed

You are correct that negligence would have to be proven, but depending on the state the standard is not that the floor was unsafe.  Some states the duty to be performed could be as high as not protecting from injury, it could be, now that would be rare, most likely would be not warning of a hazard which caused injury.  It depends if the person is a licensee or an invitee by law (check with an attorney in your state).  That's why supermarkets have so many slip and fall claims, they have the duty to protect the customer from injury in most states, meaning just the fact that it happened is proof of negligence.  

Does your state look at the same thing if you hire a realtor to sell a house, the realtor invites other realtors for a broker open house and there is a slip and fall.  In Indiana, that would be duty to protect.  It may or may not be in MI or CA.  In other words, in Indiana the fact that the person was invited to the premise for the promise of doing business would make them a licensee and mean that negligence could be assigned to the owner.  But in practice if it was a bad enough injury it will be the owner, the owners realtor, the realtors broker, any contractor that did work on that part of the house, etc that would be in the lawsuit.  

I'm not saying they would prevail, I'm saying there might be $20-30k in legal fees before it is settled.  And insurers know they can bully some people around with that threat.  Those people usually don't have insurance which would have covered the claim, because that's why they have to go out of pocket for legal fees.  (the premise liability would cover the legal fees on the above scenario).