Insurance Coverage Gaps in a Fix-and-Flip: Case Study

An investor in Georgia purchased a distressed single-family home for $85,000 with a $55,000 rehab budget and an ARV of $195,000. The investor obtained a hard money loan and purchased a standard dwelling fire policy (DP-1) at the lender's requirement. Two weeks into demolition, the investor's contractor removed the kitchen and bathrooms, disconnected utilities, and began electrical rough-in. The property was effectively under construction—gutted, with exposed framing and wiring. During a weekend when no workers were present, an electrical fire started in the panel box, causing $40,000 in damage to the partially renovated structure.

When the investor filed the claim, the carrier denied it for two reasons. First, the DP-1 policy excluded losses arising from "construction or renovation activities"—the fire was directly related to the electrical renovation work. Second, the property's vacancy (no occupants and disconnected utilities) triggered a vacancy exclusion that applied after 60 days, and the property had been vacant since purchase. The investor had no builder's risk policy, which would have covered construction-related perils during the renovation. The standard dwelling policy was designed for an occupied, maintained property—not a property under active renovation. The $40,000 loss was entirely uninsured. Additionally, the hard money lender's requirement for "hazard insurance" was not specific enough to require builder's risk—the lender accepted the DP-1 as adequate.

The investor absorbed the $40,000 loss and implemented a systematic insurance protocol for all future projects. At acquisition: purchase a builder's risk policy (not a dwelling policy) for any property requiring renovation. Builder's risk policies cost $2,000-$5,000 for a typical flip and cover construction-related perils, theft of materials, and weather damage to open structures. During renovation: ensure the builder's risk policy covers the full completed value, not just the purchase price. Add the lender and general contractor as additional insureds. Maintain general liability coverage ($1M/$2M) for contractor and visitor injuries. At completion: transition from builder's risk to a standard landlord or dwelling policy once renovation is complete and the property is listed for sale or rent. At disposition: maintain coverage until the property is transferred—many investors cancel insurance prematurely, creating exposure during the listing period.