Investor to carry insurance?

Question

I am partnering with an agent to start investing in flips. The plan is for me to be the GC on these projects.

My question is, because the GC (me) and the subs will all have insurance. Does our investment company the LLC need to carry additional insurance on each property?

Thanks

Sue Hough · Answer

@Edward Moore you most definitely need insurance for the property which is held in a separate entity. Your liability insurance as a GC does not cover the building itself, the land and any claims which happen at the home ie; a child walks by and falls on a rusty nail and claims you are negligent, a contractor injures himself claiming it was the owner of the home's fault, the buyer of the home claims the LLC was at fault and misrepresented some fact. The common thread here is the word "claim". Anyone can sue you for anything irregardless of fault and need the insurance to protect yourself.

Good luck!

Edward Moore · Answer

@Elliot Landes For the win!  Thank you for that great info, that answers all of my questions.

Elliot Landes · Answer

@Edward Moore

Finally a question on BP I feel well qualified to answer!! Haha

Yes! The LLC absolutely needs Commercial General Liability insurance and Property Policy (or Builders Risk policy is major construction is taking place). Get it for all your company and it will just follow along to every project.

I love explaining insurance and I’m big in examples, so I’ll dive in...

GL:

Your insurance for the GC covers the work/operations of the GC, as well as any garage/office/shop/premises owned by the GC. It does not the work/operations of, or premises owned by  the investment LLC. You may be able to structure the policy with both entities as Named Insureds. If it’s a low cost policy (under $10k) probable not but Speak with your agent about that.

Scenario 1

If you have a broker out to the property for a sales meeting, he’s likely there to do business with the LLC, not the GC. So that’s the LLC’s operation. If he slips and falls, he’ll sue the LLC. He probably has no recourse against the GC.

Scenario 2

This will get complicated, but I’ll try to break it down as best I can. In the insurance world there is a term called “Third Party Action Over”. What this means is a sub contractor (third party) sues (action) the property owner directly (OVER the contractor) when he gets injured on the job. You’re probably thinking, but that’s why the GC and subs carry Workers Compensation coverage. But what if he doesn’t? Maybe it be lapsed, or he is an independent contractor and exempt, or maybe you sub is using under-the-table labor. That injured person has no recourse for that injury, so there only recourse becomes suing the property owner and they will! There are even cases where the injured person collects WC and still sues the property owner! This could happen for any number of reasons, doesn’t make sense to go deep in to them now.

I could give SEVERAL more but these two do a good enough job.

Property:

If the LLC owns the property, they need to carry property insurance for the property. This covers you for direct physical loss to the building. Because property policies are often packaged with a liability component A lot of people think they are one in the same. They are not!  Property = 1st party direct physical loss. Liability = 3rd party loss (in the form of bodily injury or property  damage).

Builders risk:

Buildings in the course of major construction often don’t quality for property coverage. They’ll be insured on a BR form which may cover some combination of the actual cash value of the existing structure and the replacement cost of any renovation. Or in the case of new construction, the replacement cost o through various courses/stages of construction (it essentially scales with the project). Speak with your agent about this. If the work is light, you’re probably fine woth a property policy but if your taking things down to the studs, you might find some problems with a standard property policy.

Finally, and I can’t stress this enough, GET A GOOD SUBCONTRACTOR AGREEMENT! Make sure it has provisions for ALL the insurance they need to carry, make sure it indemnifies you for injury they cause, make sure they hold you harmless if they are injured on your site. These are far more important that insurance. Insurance stops the leak, a good contract prevents the leak.

Edward Moore · Answer

@Sue Hough Thank you! That is what I was looking for. I am assuming it is typical to open an insurance policy under the LLC?

Edward Moore · Answer

I think I get it. lets say that if the property burned down, I would obviously loose my rehab money up to that point in the project, and still be responsible for re-paying the HML. So I am thinking that I would need an insurance policy covering as much of the HML that I can get. Sound right?

Steve Morris · Answer

"do you have insurable interest in the property"

If something happens to the property will you be personally hurt if no payout from anyone's insurance?

Edward Moore · Answer

Thanks @JoeSplitrock. That's what I was thinking.

Steve, I apologize but I am not sure I understand what you mean by "do you have insurable interest in the property". Myself and my partner will be paying out of pocket for the rehab. But everything else will be funded through a HML.

Steve Morris · Answer

Well, do you have an insurable interest in the property?  3rd parties insurance is probably limited to what their contribution to the damage is, whereas as an owner you'd like to be made whole, right?

Joe Splitrock · Answer

Yes you will need insurance on the property. If someone comes on the construction site and gets hurt, they will sue the property owner. If the property burns down in a fire, the GC or subs insurance would only pay the claim if their actions led to the fire.

Investor to carry insurance?

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