Insurance

What it is

Insurance in a flipping operation is three separate policies that get mixed up constantly. Property insurance covers the building. Liability covers what happens if someone gets hurt on the property. General liability — GL — is what the contractor carries to cover their own work. Each policy does one job. None of them cover the others.

Property insurance on a flip is a builder’s risk or vacant dwelling policy, not a standard homeowner’s policy. The house is empty and under construction. A normal policy won’t even write it. Every lender on a flip — hard money or bank — requires proof of coverage before they fund. No policy, no funding.

GL on the contractor side is what protects you if that contractor’s guy falls off a roof and breaks his neck. If the contractor doesn’t have a workers comp policy and that happens, the family goes up the chain to whoever has money. That’s you. A roofer with no workers comp — the audit exposure on my GC policy alone could be 30% of what I paid them. It’s a real number.

Why it matters

There are four documents I collect before any contractor sets foot on a job site: W-9, GL policy naming me as additional insured, workers comp or workers comp exemption, and a business or personal license. I cannot write a check until I have all four. That’s not a preference — as a GC, I get audited at the end of every year and they want to see the GL and workers comp certificates for everyone I paid.

The W-9 comes first because anybody I pay over a certain threshold needs a 1099 at end of January. If you pay them cash to skip the paper trail, you don’t get to deduct the expense. Let’s say a contractor’s $10,000 job and you paid cash and can’t document it. Your rehab number just dropped $10,000. Now you’re paying taxes on $10,000 more profit. That $1,000 cash discount cost you $5,000 in taxes. Bad trade.

Insurance also has a lender component. Hard money lenders, DSCR lenders, conventional banks all have specific coverage minimums tied to the loan amount. Miss the minimum and you’re in technical default even if every payment is current. Check the loan docs.

How it shows up

The standard insurance surprise on a flip: you think you’re covered and you’re not. Standard exclusions — ongoing damage, gradual damage, wear and tear — knock out most of the stuff that actually shows up in renovation. Insurance covers sudden, accidental events. Not slow-motion neglect. Not termites. Not three wood-destroying insects. Not mold from a leaking pipe that’s been dripping for two years. Your sewer scope, moisture check, pest inspection — those are the real insurance on a flip. The policy is catastrophic coverage, not a maintenance plan.

One thing I watch for: if a contractor says they have documents, never let them on site without verifying. I’ve seen guys say “yeah I got all that” thinking it’s not a big deal to get, then they don’t have it when it comes time to write the check. I make it very clear upfront: I cannot write you a check until I have those things in hand. It is no BS because I actually can’t pass an audit without them.

Related

safety and liability, inspections, contractors, hard money, pay schedule, permitting