Do I need liability insurance for a flip on the market?

Question

Hello all, this is my first time posting although I have been making great use BiggerPockets for a while. I am new to REI and closing on my second flip in just four days! Just as a little background, my first flip was with two partners, one of whom purchased and insured the property. She has since bowed out, so this time I am making all of the business decisions myself.

I have already purchased Builder's Risk insurance for the property which does not include liability insurance. My contractor, who is my second partner, does have liability insurance, but of course this only extends to his workers and subs. My concern is that when the house is on the market I will not be insured for accidents that occur on the premises during showings or open houses. This issue came up because I actually may have a pre-buyer for the house (although I'm not banking on it). She wants to come tour it with her realtor a couple days after I close. My concern is that by letting her onto the property to see it I'm opening myself to a liability issue, which got me thinking about my liability risk when I put the house on the market.

How do the other flippers out there deal with liability while the house is on the market, or before if they are trying to pre-sell? Should I get a liability rider on my Builder's Risk policy?

I appreciate any input the more seasoned of you can give me.

Michelle Santhanam · Answer

Thank you John and BreAnn for weighing in. My gut was telling me I needed the coverage but I couldn't find reference to this issue in any of the other forums.

@BreAnn Stephenson, I will make sure I'm over covered on this one! I'm not losing my shirt at this stage in the game because I cheaped out on insurance!

@John Mocker, I went with Zurich so all they do is REI. I'm going to call my agent now and see how we can structure the coverage to best fit me. I haven't yet been in contact with a Real Estate Attorney but it's not far down on my list. Just secured a good CPA and will be addressing the other holes in my team in the next couple of weeks. I hadn't thought about liens by the subs. The more I learn the more I realize I have to learn. Thank goodness for BiggerPockets!

John Mocker · Answer

Michelle,

Yes, you do need to have Liability Insurance. The owner of the property should be the named insured. What policy we used depends on the extent of your involvement. Where the property owner is not involved in the renovation or construction it could be handled one way (premises liability policy). The other end of the spectrum is where the Contractor owns the property and is doing the work (General Contractor policy often used). In the middle is a policy for an owner acting as a General contractor but is not a General contractor themselves. Depending on where your project falls in the above spectrum, we use different companies. Contact your agent for a quote. If they can not help or if they do not know construction/Real Estate development seek out agents who do. I would recommend that you look for an Independent Agent that represents multiple companies and handles both Business and Personal Insurance.

**you may want contact an experienced Construction/Real Estate Attorney and design the contracts and insured, agreeing to hold harmless and indemnify the owner, waive subrogation, are all things that may need to requirements of your contractors. Things like having the Contractors name the property owner as an additional be included in the contract. Also, ways to avoid Mechanics leins by the subcontractors and non-performance penalties are also a discussions to have.

BreAnn Stephenson · Answer

The simple advice I would give as an agent, is yes, you should always have liability coverage. Some investors who choose to "self insure" the property coverage on a project still purchase liability coverage. Your instinct is right on the money...literally. What if someone is injured on the property and then holds you responsible? Not only do you have their doctor bills to potentially worry about, but also the cost of legal fees if they decide to sue you. If you are found to be negligent, your liability coverage would step in to cover both types of expenses. For example, we've seen instances where a tree fell on a pedestrian.... or a fire that occurs at one investor's house catches the neighbor house(s) on fire. My advice would be to NEVER go without liability coverage.

Also, typically speaking, the cost to add premises liability coverage is usually pretty low. For that reason, taking higher limits such as $1 Million per Occurrence/ $2 Million Aggregate is kind of a no-brainer. If someone is permanently injured or will have a long recovery time with physical therapy sessions, etc. involved, it's easier than you think to approach that limit. Although incidents may be rare, if something does happen, it can be the kind of event that could potentially take you out of business. You are wise to get this in place before you have any guests on the property!

Do I need liability insurance for a flip on the market?

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