Speaking from an insurance agent’s perspective, I don’t believe real estate investors take the builder’s risk policy seriously enough. I can imagine conversations go something like this, “I hate to purchase insurance, because I never file claims,” or “I’ll just get the minimum I need and the cheapest rate because they don’t want to pay…” Does that sound familiar?
If you’re like most real estate investors, you’ve at least thought it. That’s no crime. To most rational human beings, saving money on insurance is more important that eating their next meal. Then again, you’re a real estate investor. You’re not normal. But why should it be different for your real estate rehab and renovation projects?
I understand your perspective as an investor. I know the statistics for the Dallas area. Supply is down. Demand is up. Labor costs are up by 18%. Now add insurance. With ever tightening margins in an even tighter market, the Texas real estate investor must reduce expenses whenever and wherever possible. When you’re looking at your builder’s risk expense and cost, consider the following case. This is a real case, this is my case.
I purchased a property in Plano last year. When I purchased the property, the roof was in good condition. I was going to focus on the remainder of the home. My budget included work repairing everything from the foundation and plumbing up to and including the fascia and soffit. We closed the property in late February and began construction right away. Everything looked good until April and May hit.
Springs storms came. With those spring storms came several storms with hail. The sizes of hail ranged from marble size, to golf ball sized, and even baseball sized hail. Luckily, my house did not have any skylights. I could only as fortunate as my neighbors. Much to my chagrin, that didn’t matter. Our roof looked as if nature had batting practice and used our roof as a backstop.
We needed a new roof and I didn’t have the extra cash or financing to replace the roof. My partner (and dad) reminded me that we had this builders risk policy and it should cover some of our losses. He then asked, “Will it cover wind and hail damage?”
Suddenly, the light bulb turned on. I also began to worry. What if I clicked the wrong button,” and “Did I properly write the coverage?” were just a few of the questions that went through my head. That’s very strange considering that I’m the insurance agent. That worries last until the moment I called my builders risk claims department.
The insurance company I used has an 800# claims department as well as the ability to report via agent. I called them directly as the insured. After things settled down, I identified myself as the agent. The company assigned a claims adjuster within 24 hours and advised me to look for a phone call from the claims adjuster.
A few days later, the claims adjuster arrived and thoroughly examined the property. He was reasonable in his examination and evaluation. However, I had to do a few things. He wanted me to prove that I was not going to replace the roof anyway. The insurance company will not replace your roof or damage if the damage was scheduled to be completed anyway. In that case, you would be profiting on the loss. This is why they ask you the property cost, renovation costs, and final cost and value.
I provided the adjuster with my original scope of work documents, budgets, and estimates to prove I wasn’t trying to pull a fast one on the insurance company. As a result, I received a large enough claims settlement to replace my roof. In this case, the odds were in my favor. Perhaps this will help you if you’re investing in real estate.
As I look out my window and see the February rains, I realize this could happen on my next real estate project. The weather in North Texas in unpredictable. Builders risk insurance is the easiest way to protect your real estate projects. In my case, my project was a small $300,000 project. Regardless of the size, the rules are the same. A small premium, properly structured, can protect your business from financial loss. Carefully the consider, coverage and policy with the same regard