House Flipping Insurance: Types, Forms, and Settlements

Are you interested in house flipping but don’t know where to get started with insurance?

We get it. Trying to understand different insurance policies is like an exercise in confusion.

But don’t worry because we have created a simplified breakdown that includes everything you need to know about house flipping insurance.

Why You Need House Flipping Insurance

House flippers face several risks when they acquire a new property. Many things can go wrong, from potential legal action by contractors and third parties to bursting pipes and unattended furnaces.

The small price you pay for insurance is nothing compared to the potential losses. Any half-decent insurance coverage will protect you from losses in the case of an accident that you may encounter with a vacant house.

Pro house flipper tip: Always insure the property’s after-repair value to avoid losing your profits and time investment.

Types of House Flipping Insurance and What They Cover

Depending on the stage you’re at with your house flipping, you’ll need different types of homeowners insurance. Here are the four main types you’ll encounter:

Builder’s Risk Policy

Builder’s risk insurance policy is the first insurance policy you should get the moment you acquire the property. It covers the renovation period, and your lenders may not even want to fund your project if you don’t have it.

Builder’s risk insurance protects you against any damage to the home structure. The named perils typically include vandalism, hail, fire, lightning, and earthquakes. It also covers equipment, materials, and other supplies. 

Some builder’s risk policies even cover legal and engineering fees.

However, a major drawback is that it often doesn’t cover construction worker errors, poor workmanship, and theft. You’ll need professional liability insurance for that.

The builder’s risk policy only covers the renovation and repair period. The moment construction ends, your insurance coverage ends with it. At that point, you must switch to dwelling or vacant home insurance coverage.

Pros

• Better overall coverage than other types of insurance
• Covers the cost of the property and renovation when it’s most vulnerable
• Protects against vandalism and natural disasters

Cons

• Ends with the renovation period
• Doesn’t cover human error, theft, or injuries

Dwelling Insurance Policy

A dwelling insurance policy is the most basic form of insurance for house flippers. It’s typically taken out the moment the builder’s risk insurance coverage ends to ensure you aren’t left without any insurance on your shiny new property.

This policy covers damages that happen to the house’s structure. Perils include fires, floods, earthquakes, and vandalism.

While the dwelling insurance policy covers things like your roof, garage, doors, and windows, it doesn’t provide any coverage for your personal property and theft.

Note that home appliances are considered personal property here. If you want personal property coverage, speak to your insurance agent about purchasing an add-on. Thankfully, it only costs $10 to $20 extra in most cases.

A major drawback of this policy is the vacancy exclusion clause. In other words, you won’t have insurance coverage if the house remains vacant for 30 to 60 days, depending on your contract.

That’s why you should take out a dwelling insurance policy only if you already have potential buyers while the house is still undergoing renovations.

Pros

• More affordable than vacant home insurance
• Covers natural disasters and vandalism
• Cost-effective for short-term coverage

Cons

• Doesn’t cover vacancy periods
• Personal property coverage costs extra

Vacant Home Insurance Policy

Vacant home policies are the most diverse in both coverage and pricing. The one thing they all have in common is that they cover homes that sit vacant for extended periods.

Since a home that sits empty for months on end is considered high-risk, vacant home insurance costs significantly more than a dwelling insurance policy.

But it’s worth every penny because it protects your property against vandalism, theft, fire and water damage, and natural hazards.

Like with dwelling insurance, you can typically purchase add-ons to cover things like personal property and maintenance. 

Speaking of maintenance, some insurance providers require regular inspections and proof that the house is vacant. 

Note that vacant home insurance is sometimes offered as an add-on for your dwelling insurance policy.

Since vacant home insurance is expensive, house flippers only get it for expensive properties that won’t get a buyer within a month or two.

Pros

• Covers your vacant building for extended periods
• Excellent and customizable coverage
• Protects against theft and vandalism

Cons

• Expensive
• Complicated and strict vacancy requirements
• Regular inspection may be required

General Liability Umbrella Policy

Every house flipper needs an excellent general liability insurance policy. It’ll protect you from litigation if a construction worker, future home buyer, or anyone else gets injured and wants to sue you. It may also cover potential charges from lenders.

For instance, they might claim that you created an unsafe work environment and demand you pay their medical bill. These types of bills can eat into your profits and turn your 70% investment into a 90% one.

Before you write liability insurance off as an unnecessary cost, think again. It can protect you against a potential fatality that occurs on your property.

Look for a liability insurance policy that’ll specifically protect you from work-related injuries that happen on your property.

Pros

• Protects against litigation related to bodily injury or fatality
• Covers legal and medical costs

Cons

• Doesn’t cover workers’ medical bills

Basic, Broad, and Special Form Coverage for House Flipping

There are three main types of insurance coverage for house flippers. The costs and perils included vary significantly between the three as well as your insurance company.

Basic Form

Basic form coverage protects you against perils specifically included in the policy. The exact list varies but typically includes less common or cheaper-to-cover perils, such as:

• Fire
• Tornadoes
• Lightning
• Aircraft collisions
• Hail
• Weight of ice, snow, or sleet
• Volcanic eruption
• Smoke
• Explosions

Vandalism and even theft are typically not on the list. However, better and pricier insurance companies cover that in their basic form, too.

Broad Form

The broad form includes everything from the basic form, but it also adds some or all of the following:

• Burglary
• Vandalism
• Water and plumbing
• HVAC issues
• Falling objects

Special Form

Special form is the best type of coverage, but it’s also the most expensive. It costs about 20% to 30% more than broad form coverage.

Rather than covering listed perils, special form covers all perils except for those listed as exclusions in the policy. This means you’ll get compensated for almost everything. The burden of proof falls onto the insurance company. 

If they can’t find sufficient evidence that the damage was caused by an excluded peril, they’ll have to pay you.

This is where the price difference between insurers shows, as some won’t cover expensive repairs related to floods, sewer backup, earthquakes, and other major disasters.

Replacement Cost vs. Actual Cash Value: Which Is Better for House Flippers?

There are two types of settlements you can get from your insurer if something goes awry. Let’s see how they work and what you can expect from them.

Replacement Cost Value

As the name implies, this type of settlement provides the full replacement cost regardless of the condition of your fixer-upper. 

They are compared to similar houses on the market and will cover the entire cost of the repair or replacement.

It doesn’t take the value of the lot into account, but the value of the land is unlikely to be affected anyway.

If something happens to your house, it’ll be fully reimbursed, preventing you from a major loss.

Actual Cash Value

Actual cash value takes wear and tear into account. 

This type of settlement is detrimental if you have an older property, as you’ll only receive a small portion of the actual value.

You might lose a lot of money if you overpaid for the house. Still, these types of policies are significantly cheaper than replacement cost insurance. If you’re short on cash, an actual cash policy is better than nothing.

Frequently Asked Questions

Wrapping Up

House flippers need excellent insurance coverage to avoid losses in case something happens to their property. In addition, they also need a general liability umbrella policy to protect them from all types of litigation.

Don’t underestimate the value of good insurance. If you can afford it, spring for special form coverage to minimize the risks. Make sure to take your insurance costs into account when calculating the investment costs.