Builder's risk insurance for BRRRR

Member since 2023 · 31 posts · 27 votes

Hello, I am currently submitting all my paperwork for a new hard money loan through my LLC (for a single family BRRRR in Philadelphia). I am adding a half bath to the first floor, so my lender has mandated that I get builder's risk insurance. I'm fine doing so, but the rehab is expected to be completed in 6 weeks or less, so my concern is getting locked into a monthly builder's risk insurance payment longer than I have to be.

Do any of you have experience with this, and any watchouts I should look out for? For example, would I need to provide a certificate of insurance from my contractor, listing my LLC as an additional insured? Also a very basic explanation of what builder's risk insurance is, would be very helpful (first time buyer here)! Thank you in advance.

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Greg Kasmer

Rental Property Investor · Philadelphia, PA · Member since 2021 · 782 posts · 505 votes

Jessica - Usually a builder's risk policy can be converted to a occupied policy with the same company. Or, you can cancel the builder's risk and get refunded the "unused portion" of the policy. Also, they would typically want a builder's risk policy until the property is occupied, so you may have a period in time when the renovation is complete, but no one is living in the house yet, so you'll likely need to stay on your policy during that time. I don't think the insurance company will need information about your contractor (i.e. his insurance), but may ask about the scope or the project to understand how to set up an appropriate policy. Good Luck!

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Greg Kasmer
Rental Property Investor · Philadelphia, PA · Member since 2021 · 782 posts · 505 votes
3y
Jessica - Usually a builder's risk policy can be converted to a occupied policy with the same company. Or, you can cancel the builder's risk and get refunded the "unused portion" of the policy. Also, they would typically want a builder's risk policy until the property is occupied, so you may have a period in time when the renovation is complete, but no one is living in the house yet, so you'll likely need to stay on your policy during that time. I don't think the insurance company will need information about your contractor (i.e. his insurance), but may ask about the scope or the project to understand how to set up an appropriate policy. Good Luck!
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John Mocker
Insurance Agent · Norwalk, CT · Member since 2016 · 2k+ posts · 1k+ votes
3y
Jessica,
The Policy you will be looking for is a Renovation Builders Risk policy.  Covers the existing structure and the renovations as they are incorporated. There are companies that write this strictly on a non-refundable basis so you would purchase a minimum term (3 mos with most of the companies).  The good news is there are many companies that will write the coverage on an annual basis and cancel it pro rated when you get your Certificate of Occupancy. That would normally be your lowest cost option.
One thing that has caused issues with the banks in the past are the limits. Most companies will only cover the existing structures at the Actual Cash Value (ACV) which is the Replacment Cost (RC) minus the deprectiation.  The banks generally will want the building limit to be the loan amount or the Replacement cost.  Discuss the options with an agent who writes with many companies for the Renovation Builders Risk and also the bank to make sure that the correct limits (as required for the closing) are quoted.
Lastly, because of the short duration of the project, I would get quotes on the Dwelling Fire (aka Landlord) policy now.  That way you can pull the trigger on that coverage once the renovations are completed.
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Alex BekezaBusiness Member
Lender · Los Angeles, CA · Member since 2018 · 2k+ posts · 1k+ votes
3y
@Jessica Stern This is pretty standard. Once you convert/replace with a rental policy then you should receive a pro rated refund from the insurance company for the month's you didn't use.
Which HML are you using?
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Cameron Moore
Insurance Agent · DFW, TX · Member since 2021 · 348 posts · 245 votes
3y
Some carriers have premium fully earned, others actually will pro-rate. Find an insurance broker (Usually hard money lenders will have a relationship with one) that is familiar with BR and ensure they use one that will pro-rate after 6 weeks.
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Mike Klarman
Specialist · NJ · Member since 2022 · 1k+ posts · 663 votes
3y
So, first of all on bridge loans you usually can do a 6 month policy. Most lenders will require it be paid upfront, but if you sell you can get a refund for the unused months. If refi they will just adjust the policy.
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Andrew PostellPro Member
Lender · Fort Worth, TX · Member since 2016 · 8k+ posts · 6k+ votes
3y
@Jessica Stern thanks for the post. You have some good comments above but I want to provide some clarification too if you don't mind.
Builder's Risk - this protects the property from loss while it's under construction. Since a property under construction will have materials laying around, things not permanently attached, etc. the risk is a little different. But it protects the property and the materials essentially.
Your Contractor's Insurance - Now, you should STILL make sure your contractors have insurance too. Their insurance protects THEM and their EMPLOYEES though. So, if someone gets hurt on your job site - that's where your contractors insurance will kick in. And that, in a way, protects you. You don't pay for this, this is on them.
Length of Policy - lots of Builder's Risk (BR) policies are 6 months in length. You usually pay for the entire policy up front. If you finish the rehab in two months, you would then convert to a "normal" insurance policy that will be less expense. When you cancel the BR policy, they will refund you the difference of the policy you didn't use - the 4 months difference here basically.
Other Insurances - there are tons of OTHER insurances too...usually your policies will come with some type of minimum coverages in other areas (liability for example) so just ask some basic questions to your agent about those other things. I usually don't take any other POLICIES out...but I do like it when my policies have some other small coverages built in.
Hope all of that makes sense!
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