How Do You Insure an Accessory Dwelling Unit?

Quick Answer

Purchasing homeowners or landlord insurance is a smart move to protect your accessory dwelling unit (ADU) investment. Find out how an ADU affects your home insurance costs and what type of insurance you may need.

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Building an accessory dwelling unit can be a great way to house aging parents or generate extra income. Accessory dwelling units (ADUs) can usually be added to your homeowners insurance policy if a family member lives there; if you're renting the unit out, you generally need landlord insurance. How much you can expect your insurance costs to rise depends on whether the ADU is attached to your primary residence, how you plan to use it, who will live there and other factors. Here's what you need to know.

Are ADUs Covered by Homeowners Insurance?

How ADUs are covered by insurance can vary widely depending on a variety of factors, including:

  • State and local laws
  • Who lives in the unit
  • Whether the occupants pay rent
  • Whether the unit is freestanding or attached to your home
  • Whether the ADU has a separate address
  • Whether the ADU has its own utilities

The type of coverage you need can also differ from one insurance carrier to another.

In general, an ADU that's attached to or part of your home (such as an addition or basement apartment with a separate entrance) can be covered by your homeowners insurance policy. As with any home addition or renovation, you'll need to tell your insurance company about the ADU to see how your home insurance will be affected. Whether you've added square footage to your house or you've remodeled a basement or attached garage to make it a living space, the changes will make your home more valuable and more expensive to rebuild, requiring more homeowners insurance.

What about freestanding ADUs? Some home insurance policies include coverage for "other structures" on your property, such as gazebos or detached garages. This insurance may cover a detached ADU, but you should check with your insurance company to confirm. Coverage for other structures is usually limited to 10% of your total dwelling coverage. If your home insurance dwelling coverage is $350,000, other structures would be covered for up to $35,000. That may not be enough to rebuild a freestanding ADU, which can cost $150,000 or more.

If the occupants of your freestanding ADU are relatives by blood or marriage, some insurance carriers cover the ADU structure under your homeowners insurance, even if your relatives pay rent. However, if you're renting a detached ADU to a non-family member for an extended time (such as six months or more), you'll typically need landlord insurance.

Landlord insurance generally covers:

  • Damage to the structure of the rental unit by fire, lightning, wind, hail or other covered perils
  • Any of your personal property that is on the rental premises (such as furniture or appliances you provide for the tenant)
  • Liability protection, including medical payments and legal fees, if a tenant is injured on the rental property or files a lawsuit against you
  • Reimbursement for lost rental income if the property is uninhabitable due to damage from a covered peril

Planning to use your ADU as a short-term rental on a peer-to-peer site such as Airbnb? Contact your insurance company to see what your options are. Some insurance carriers sell home-sharing liability insurance you can buy month-to-month. Some view ongoing short-term rentals as a business and might require buying a business insurance policy. Others cover occasional short-term rentals under your regular homeowners policy or an endorsement to that policy.

The cost of insurance for your ADU depends on factors including:

  • The ADU's square footage, materials and construction
  • The risk of crime and natural disasters in your area
  • Whether your ADU is covered by homeowners insurance or landlord insurance

The Insurance Information Institute estimates that a landlord insurance policy costs about 25% more than a standard homeowners policy for the same type of unit, so budget accordingly for this increased expense.

What Does Homeowners Insurance Cover for ADUs?

Homeowners insurance that covers ADUs generally includes:

  • Liability protection if someone is injured on the property
  • Structure or dwelling coverage to rebuild or repair the ADU's structure from damage due to fire or smoke, hail, lightning, wind, vandalism and some types of water damage
  • Personal property coverage to repair or replace the homeowner's belongings if stolen or damaged by a covered peril

By the time you have a home insurance claim, rebuilding costs may be higher than when you purchased your policy. Consider purchasing these optional coverages for extra protection:

  • Extended replacement coverage increases your structure coverage by 20% and up if rebuilding costs have risen.
  • Inflation coverage annually adjusts your coverage to keep pace with inflation.
  • Guaranteed replacement coverage pays to rebuild the home exactly as it was, even if doing so exceeds the limits of your coverage.

Flood and earthquake damage are not covered by standard homeowners insurance. If you live in an area where these events are common, you'll need to buy separate flood and earthquake insurance for your ADU, or add your ADU to your existing flood and earthquake insurance policies.

Landlord insurance does not cover tenants' possessions. Tenants can protect their belongings from damage or theft by purchasing renters insurance.

Some homeowners insurance covers the personal possessions of your ADU's occupants if they're related to you. In this case, make sure your personal property coverage limits are high enough to protect both your personal belongings and theirs.

If an ADU damages your main home—for example, your ADU catches fire, sparks fly and your primary home burns down—your homeowners insurance covers the damage to your home and personal property. Either landlord insurance or homeowners insurance (depending on which you have) will pay for damage to the ADU. Landlord insurance won't cover a tenant's belongings, and homeowners insurance typically won't, either; for that, your tenant needs renters insurance.

Do You Have to Insure Your ADU?

You aren't legally obligated to buy either homeowners insurance or landlord insurance for an ADU. However, if the unit is financed or mortgaged, lenders typically require that you purchase enough insurance to protect their investment.

Many homeowners use a cash-out refinance, home equity loan or home equity line of credit (HELOC) to finance an ADU's construction. Should you fail to repay these loans, your primary home could be at risk. Purchasing proper insurance for your ADU can help ensure you can repay your loan, even if your ADU is damaged or destroyed.

Even if you used personal savings or other resources to pay for your ADU, insuring it is a smart move. Otherwise, you'd have to tap your savings again to rebuild or repair a damaged ADU.

The Bottom Line

Insuring your ADU comes at a cost, but it's necessary to protect your investment. Since an ADU's design, construction and location can affect insurance costs, consider talking to your insurance company while the unit is still in the planning stages. They may have building or design tips that can keep your insurance costs down.

Improving your credit could also help reduce the cost of homeowners or landlord insurance. Most states allow insurance carriers to check your credit-based insurance score before setting home insurance premiums. Making timely payments, reducing your debt and avoiding new credit applications can help to boost your credit score and potentially shrink your premiums. Check your credit report and credit score before applying for new insurance and take steps to improve your credit score if necessary.