Property Insurance for Flipping Houses: How to Select Your Policy
Arcana Insurance Services is an all-lines property and casualty managing agency that’s been working with real estate investors since it began in 2005. But long before that, founder and CEO, Mark Gannaway, served as President, Chief Marketing Officer, and Executive Vice President for several other well-known agencies and brokerages. With over 30 years of experience behind him–including 18 with Lloyd’s of London–Mark knows the insurance industry inside and out. That’s why I chose him as my broker several years ago, and why he’s become a trusted friend and colleague since.
As you can imagine, I’ve had many conversations with Mark over the years about my own property insurance needs and those of the investors I mentor. Professionals like Mark help keep my portfolio protected and my business profitable, and I take every opportunity to pick their brains and pass that knowledge on. So, I asked Mark if we could talk specifically about buying property insurance for flipping houses and how to find the right policy.
How to Select Property Insurance for Flipping Houses
Right out of the gate, Mark stated that one of the biggest mistakes he sees with new and experienced investors alike is the assumption that a homeowners policy is all they need to cover an investment property. Out of lack of knowledge or an effort to save money, they’ll extend their homeowners policy to a house they purchased to rehab and sell. But if the house is vandalized or flooded, they soon find their policy doesn’t apply.
“I preach this to everybody: Stop adding an additional type insured endorsement to your homeowner’s policy or adding a secondary location–especially when you have three or four houses that you own as an investor. You definitely want to be on a landlord policy and get out of your homeowner’s policy.”
The reason, he explained, is simple: insurance companies investigate claims. A typical homeowners policy requires that the property is occupied. This is a grey area where some real estate investors try to be dishonest with the insurance company. But “occupied doesn’t mean a table and chairs and a few pieces of furniture in there,” says Mark. “If they can prove the claim occurred when nobody was at the property, chances are they will deny the claim.” Without a tenant or the investor himself staying at a property, chances are good the insurance company will discover that the property is unoccupied and not cover any damages that occur.
Even with tenants, a typical homeowners policy has its limits. If the insurance company can prove the tenants caused the damage in question, the intentional acts clause also gives reason to deny a claim. With a landlord policy, these claims have a chance of getting paid. “With a homeowners policy,” says Mark, “any losses that occur are going to go back to your personal loss history. If a tenant is creating the damage, it’s going to impact your own policy.”
So choosing the wrong policy–whether intentionally or by mistake–can both sink your potential profits if you have to pay out of pocket and raise your homeowner’s policy rates. In the end, it’s better, and cheaper, to get the right policy. And to get the right policy, you’ve got to get a good insurance broker.
Cover Your Assets: Choosing an Insurance Broker Who Knows About Investing
You also don’t want to regret buying the wrong type of insurance, especially when investing in single-family residences–something I, and many other real estate investors, do. There is a difference between a homeowner policy and an investor, or landlord, policy. Not knowing that difference can cost you. Simply put, a homeowner policy covers the contents of the house. An investor policy, on the other hand, covers the structure itself. But another distinction is worth noting: liability coverage. Whereas a homeowner policy comes with broad liability coverage, it needs to be added to an investor policy, especially during renovation and even if the contractor is insured, according to Mark.
“Always look at experience and area of expertise because most brokers either focus on personal lines or commercial insurance. Some like myself focus on working with investors, landlords, and property managers all over the country. I’d be looking for someone who represents a good company and understands the industry.”
In addition, if you have more than one investment property, Mark recommends a master policy that covers the entire portfolio: “The benefit is leverage. The more premium you have with an insurance company, the more leverage you have.” He adds that you’ll also see discounts on your rates.
What if you have a property that’s difficult to insure? You can still find coverage in the private market. Mark says there are very few reasons to rely on a state’s Fair Access to Insurance Requirements (FAIR) plan, and those reasons tend to center on bad business practices by the investor rather than on the investment he’s trying to insure.
As a HomeVestors® franchisee and Development Agent for new independently owned and operated franchisees coming onboard, I’d say that’s a very smart move.
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