When most people think of homeowners insurance, they think of the standard policies that cover an owner-occupant?s primary residence against ordinary hazards like tornados, wildfires and hurricanes. They may also think of flood insurance, though typically flood protection isn?t included in a standard homeowners policy. Underwriters of these policies set their premiums and coverage assuming that someone is living in the house. They also set coverage levels according to the home replacement value and the declared value of the furnishings and other property permanently in the home.
That?s not you.
Think of it: If you buy a property and plan to make significant improvements to it, no one is going to be living there for a while. Even if you only hold the property for a month or two while you renovate, that is plenty of time for vagrants or squatters to move in and potentially cause damage. That?s enough time for thieves to move in under cover of night and steal fixtures, furnishings, appliances, copper coils from air-conditioning units, plumbing, and anything else of potential value. In some cases, criminals have operated meth labs on temporarily vacant property ? potentially turning the entire property into a HAZMAT site requiring an expensive cleanup.
Standard homeowner forms of insurance may not protect you from this kind of damage if you have no one living on site and you don?t disclose this to the insurance carrier ? especially if the damage arose as a result of the house being more of a construction site than a residence for an extended period of time.
Also, when you are in the middle of the project, you not only have the house itself on the property ? you may also have tens of thousands of dollars? worth of construction materials and equipment on site. Think lumber, plumbing, power tools, even backhoes and other expensive items.
All these items are just as vulnerable to flood, fire and theft as the home furnishings that most of us routinely insure ? and as the property owner, you are responsible for any losses to these materials, except those due to the negligence of the construction contractor. But take note: Your homeowners policy does not cover losses of construction supplies and equipment on site.
For this, you need to take out a separate kind of policy: construction risk insurance.
These policies are designed specifically to cover risks to properties while a construction or renovation project is underway. Underwriters are fully aware that there?s no one necessarily living on the premises 24 hours a day ? and they are also aware that there will typically be construction supplies and materials stored on site. They therefore design their policies and set premium levels with these factors in mind.
Policy Design Considerations
Remember that construction risk policies don?t come in a standardized form, like homeowners policies. Most consumer-type coverage is subject to close scrutiny by regulators, and insurers have to submit proposed insurance contracts for approval. With some commercial lines, though, including builders risk insurance, the buyer is assumed to be more sophisticated. This reduces consumer protection somewhat ? but also allows much more flexibility in designing a policy.
When you examine a builder?s risk policy, look carefully at what it does and does not cover. For example, is scaffolding specifically covered under the policy? Or will you have to add it? What about heavy equipment like bulldozers, Bobcats and backhoes? In most cases, the initial policy will not cover this type of equipment. You may want to have the contractor show you a certificate of insurance to protect yourself, or add a contractors equipment rider to your policy.
Also, make sure the coverage accounts for your own overhead and profit. After all, the loss of potential profit on a deal is also a loss, as surely as damage to on-site construction materials. Lost profits can and should be insured. Typically, underwriters assume about 10 percent profit as reasonable ? and occasionally up to 20 percent. Naturally, premiums will be a little higher ? but given the time and expense you have to go through to find a flippable deal, it may be worth it to buy the extra coverage.
Exclusions
As with any type of insurance coverage, you should carefully examine the list of exclusions. Other than vandalism, most builder?s risk insurance does not cover damages due to intentional actions ? called ?non-fortuitous? in insurance parlance. Your contractors may have some coverage protecting them from employee actions, and you may have a tort against a contractor if an employee sabotages your project.
Other common exclusions from builder?s risk policies include legislative or zoning changes affecting the value of the property or your ability to continue the project, acts of war and nuclear hazards, steam boiler explosions and pollution. Flood and ?earth movement? (i.e., sinkhole) coverage is typically available with a rider or separate endorsement. Make your own assessment of the risk on the site to determine if this coverage makes sense. If you?re in a flood plain or at the bottom of a hill, it?s certainly something to consider. If it can hurt you if you lived there, chances are it can hurt you during the construction stage, too.
Update the Policy as Needed
If the scope of the project changes ? or if you need more materials than previously estimated, you should consider changing the policy accordingly. Otherwise you could have an uncovered risk that you could have easily taken care of with a few extra dollars in premium. Your carrier may require you to submit a monthly form detailing the current or expected value of property at risk under the policy. You can also submit change orders as they happen. Your carrier will tell you what additional premium, if any, is required.
Land
The value of the land itself is excluded from builder?s risk policies. But you can get policies to cover improvements you make to the land, such as landscaping.
Liability
Builders risk insurance does not normally cover liability. You need separate cover to protect yourself against the possibility that a worker will be injured on your property. If you are employing people directly, that could mean you need your own workers? compensation insurance. However, if you are working through a general contractor, that contractor?s workers will fall under his policy. The same holds true for subcontractors. However, you will still probably want to keep your basic homeowners insurance policy in place, possibly supplemented with an umbrella policy, so your total is good for $2 million to $5 million in liability coverage altogether ? and perhaps more if you own a lot of different properties. Remember ? this is separate from builder?s risk insurance.
Termination
Generally, the insurance coverage ends when the project is completed, the property is sold or the term of insurance ? usually up to one year ? expires. Note that builder?s risk insurance isn?t like car insurance: You don?t get a refund of premiums if you finish early. The contracts typically specify that the carrier has ?fully earned? the premium, even if you finish early.
Builder?s Risk vs. Inland Marine Coverage
The key to understanding builder?s risk insurance is that it?s site specific. It does not cover materials and supplies in transit. If construction materials get loaded up at the warehouse, but never make it to the property, builder?s risk insurance does not cover it. The materials must make it to the construction site itself to be covered. If you want coverage for materials in transit, and not just on site, you may want to look into a different kind of coverage, called ?inland marine? coverage.
Where to Get Builder?s Risk Insurance
The standard, garden-variety personal P&C agent may not know much about construction and builder?s risk insurance. This is a pretty specialized insurance line and many personal P&C agents only understand it well enough to be dangerous.
Chances are good you?ll need to go to an agent or carrier who specializes in commercial-type policies and who routinely insures general contractors on building sites. These people deal with these policies every day, and can insure your property and cover your risk much more efficiently than general practitioners trying to do everything. You may want to canvass the more established, experienced contractors you work with for references to the most experienced agents in your area.
You can get a more detailed look at the ins and outs of builder?s risk insurance?from Adjusting Today, a trade magazine for professional insurance adjustors.
Jason Van Steenwyk is a veteran financial industry journalist who has been fighting to make the world safe for the retail investor since 1999. He lives at Ground Zero of the real estate bubble in Fort Lauderdale, Florida.
Source: http://www.realestate.com/advice/flippers-is-your-home-insurance-shovel-ready-10377
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