OPERATIONS
INSURANCE
Insurance for Your Perfectly Designed Investment Property FOLLOW THESE GENERAL BEST PRACTICES FOR INSURING ANY INVESTMENT PROPERTY THAT WILL UNDERGO SOME FORM OF REHAB.
by Sam Brust
ou’ve decided on your first, third, or hundredth new invest-
amount. They can utilize building cost data based on the scope of the project and the geographic area to determine an estimated cost to rebuild. If you are using a lender to leverage your project, you will also need to adhere to their insurance requirements for the loan. They will often require your insurance policy to, at minimum, have a builder’s risk endorsement. They will also require the property coverage amount to be at least up to the loan amount unless a full replacement cost estimate is provided proving the need for a lower coverage amount.
the same best practices above apply. Be mindful and aware of potentially harmful fumes or airborne mate- rials. It goes without saying, but please don’t fumigate the property with tenants inside. BUILDER’S RISK ENDORSEMENT Cosmetic rehab of a property typically includes painting, updating fixtures, or remodeling a bathroom or kitchen. An insurance policy for this project often looks like a rental property insurance policy with the addition of a builder’s risk endorsement. An endorsement in insurance changes the base policy by adding, removing, or modifying the lan- guage in the policy. Specifically, a builder’s risk endorsement could add coverage for fixtures and machinery, equipment used in the course of updating the property, and building materials and sup- plies used for construction. This endorsement will often expire if construction is abandoned, 60-90 days after construction has been completed, or once the property has become occupied. Please note this doesn’t cause the entire policy to end, just the builder’s risk endorsement.
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ment property, and now the real work begins. Is the property turnkey ready for tenants? Does it need some cosmetic rehab, or maybe some more extensive work? Is it a ground-up construction project? The answer to those questions
will help you choose the most appropriate insurance policy for your property.
Before we dive into the details of each policy type, let’s review some general best practices for any invest- ment property that will undergo some form of rehab. TOTAL COMPLETEDVALUE Selecting an appropriate cover- age amount for the property plus any improvements is an excellent first step. The cost of materials, labor, and inflation can increase these amounts, so what you may have insured a property for two years ago may not be the same calculation today. Your best practice will be to insure the property for Total Completed Value. A simple rule of thumb for valuation for insurance is selling price minus land value. Insurance agents have many tools at their disposal to help you select the appropriate coverage
GENERAL LIABILITY Many investment property
insurance policies also include general liability insurance. Make sure yours does. We recommend a $1 million per occurrence coverage amount here. When conducting any level of rehab, it is best practice for the prop- erty to be vacant. The use of licensed contractors and labor that secure the premises before, during, and after their work, including raw mate- rials, ladders, etc. will help mitigate any theft or vandalism claims along with injury liability claims, including trespassers. If maintenance on the property needs to be done while tenants are occupying the property,
92 | think realty magazine :: may – june 2022
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