Just like your primary residence, you should carry hazard insurance on every investment property you own (and, in fact, your construction lender will require you to do so). This insurance protects you against catastrophic events such as fire, as well as certain other losses such as theft or vandalism.
When obtaining hazard insurance for your fix and flip, rehab, or construction project, it is important to tell your insurance agent about your plans for the property. Standard insurance policies, such as you would obtain for your primary residence, do not typically provide coverage for vacant properties and, if you obtain the wrong policy, the insurance company may eventually cancel your policy or, worse, deny your claim if a loss is incurred. For this reason, it is critical that you tell your insurance agent upfront that you’ll be performing renovations on a vacant property so that the correct type of policy is issued.
When selecting the amount of coverage to be obtained, be sure to consider the full extent of costs that need to be insured. Your fix and flip lender may only require that the coverage be equal to the loan amount; however, this will not protect any cash that you have invested in the property. For example, if you have an $80,000 loan and have invested $20,000 of cash into a property that is destroyed in a fire, an $80,000 insurance policy would go entirely to repay your lender, leaving you with a loss of $20,000. A policy with “replacement cost” coverage, meaning that the insurance company will pay whatever amount is necessary to replace the property, is the best option for your protection.
Theft and Vandalism Coverage
Rehab and construction projects carry additional risks, as supplies, materials, and tools may be sitting unattended at your property for periods of time. For this reason, it is advisable to obtain a policy that includes coverage for theft of materials and other types of vandalism.
Liability insurance is an often overlooked, but very important, requirement of rehab and construction projects. Anyone who is injured on your property – whether they have permission to be there or not – can potentially file a liability claim against you. Since active construction projects present a much greater risk of injury, it is critical that you are adequately insured. Additionally, liability insurance is relatively inexpensive, so overlooking this coverage is unwise. Construction lenders will typically require coverage of between $500,000 and $1,000,000 per occurrence.
Additionally, your contractor should be required to maintain general liability insurance coverage and provide you with evidence of this coverage. Be aware, though, that while these coverages are similar, the contractor’s liability insurance is not a complete substitute for carrying your own liability insurance.
If your property is located in a Special Flood Hazard Area (SFHA), as designated by FEMA, you’ll be required to carry flood insurance. Standard hazard insurance does not cover losses related to flooding, so this coverage will be in addition to your regular hazard insurance. In order to obtain flood insurance, your insurance agent may need to order an elevation survey, so be sure to start this process early if flood insurance will be required.