ADU Insurance: What You Need to Know

# ADU Insurance: What You Need to Know

Adding an ADU to your property increases your homeowners insurance by $300-$1,000 per year depending on ADU size and whether you're renting it. If you rent your ADU, you'll need landlord liability coverage (adds $200-$500/year). Total annual insurance increase: $500-$1,500 for most homeowners. This isn't optional - your lender requires it, and you need the protection.

The good news: insurance is straightforward once you understand what coverage you need. Most homeowners just call their existing insurer, explain they're adding an ADU, and get updated policy.

## How ADUs Affect Your Homeowners Insurance

**Your existing policy covers:**
- Your main house structure
- Personal property inside
- Liability if someone is injured on your property
- Additional structures (garages, sheds) up to certain limits

**What changes with an ADU:**

**1. Dwelling coverage increases**
Your ADU is an additional structure that needs to be insured. If it costs $200,000 to build, your dwelling coverage needs to increase by roughly that amount (or your additional structures coverage needs to be sufficient).

**Typical increase:** Your premiums go up by 0.5-1% of the ADU's value per year.
- $200,000 ADU = $1,000-$2,000/year increase
- $150,000 ADU = $750-$1,500/year increase

**2. Liability coverage needs adjustment**
If you're renting your ADU, you have tenants coming and going, increasing potential liability exposure. Standard homeowners liability might not be sufficient.

**3. Loss of use coverage increases**
If disaster makes your property uninhabitable, loss of use coverage pays for temporary housing. With an ADU generating rental income, you want coverage for that lost income too.

## Coverage for Non-Rental ADUs (Family Use)

**If family member or guest lives in ADU rent-free:**

Your standard homeowners policy usually extends to cover the ADU with relatively minor changes.

**What you need:**
- Increase dwelling/additional structures coverage to include ADU value
- Confirm liability coverage is adequate (typically $300,000-$500,000 minimum)
- Update personal property coverage if ADU contains significant furnishings

**Cost increase:** $300-$600/year typically

**Real homeowner:**
"We called our insurance company when adding ADU for my mom. They increased our coverage by $180,000 (ADU build cost) and annual premium went up $420. Simple process, one phone call." - Sacramento homeowner

## Coverage for Rental ADUs

**If you're renting your ADU for income:**

You need landlord insurance, also called "dwelling policy" or "rental property endorsement." This is separate from standard homeowners coverage.

**What landlord coverage includes:**

**1. Dwelling coverage for ADU structure**
Protects the physical ADU from fire, storms, vandalism, etc.

**2. Landlord liability**
Protects you if tenant or their guest is injured on the property and sues. Critical coverage.

**3. Loss of rental income**
If ADU becomes uninhabitable due to covered event (fire, flood), insurance pays your lost rental income during repairs (typically 6-12 months coverage).

**4. Property damage by tenants**
Covers damage beyond normal wear and tear if tenant causes damage (beyond security deposit).

**What it doesn't cover:**
- Tenant's personal property (tenant needs renter's insurance)
- Tenant's liability (tenant needs renter's insurance)
- Intentional damage by owner
- Wear and tear

**Cost for landlord coverage:** Additional $400-$800/year beyond the base dwelling increase

**Total rental ADU insurance increase:** $700-$1,400/year typically

## Liability Limits: How Much Do You Need?

**Minimum recommended:** $500,000 liability coverage for rental ADUs

**Better:** $1 million liability coverage (costs only slightly more)

**Best:** $1 million base + umbrella policy for $2-5 million additional coverage

**Why higher limits matter:**
If tenant or guest is seriously injured and sues, medical bills and legal costs can exceed $500,000 quickly. One lawsuit can wipe you out financially without adequate coverage.

**Umbrella policy costs:** $200-$400/year for $1-2 million additional coverage. Cheap protection.

**Real scenario:**
Tenant's guest slips on icy ADU steps, breaks hip, sues for $800,000 (medical bills, lost wages, pain and suffering). Your $500,000 liability covers $500,000. You're personally liable for $300,000 + legal fees without umbrella policy.

## Requiring Tenant Renter's Insurance

**Best practice:** Require tenants to carry renter's insurance.

**What tenant's policy covers:**
- Their personal belongings
- Their liability if they cause injury or damage
- Temporary housing if ADU becomes uninhabitable

**Typical cost for tenant:** $150-$250/year for $30,000 contents coverage

**Why this protects you:**
If tenant's negligence causes damage (leaves stove on, starts fire), their renter's insurance covers it, protecting your ADU and reducing your liability.

**Lease language:**
"Tenant must maintain renter's insurance with minimum $100,000 liability coverage and provide proof of insurance annually."

## Short-Term Rental Insurance (Airbnb/VRBO)

**Standard homeowners or landlord policies often DON'T cover short-term rentals.**

**What you need:**

**Commercial short-term rental insurance** or specialized STR policy. These are designed for frequent tenant turnover and daily rentals.

**Coverage includes:**
- Property damage
- Liability for guest injuries
- Business interruption (lost rental income)
- Contents coverage (furniture, appliances you provide)

**Cost:** $1,500-$3,000/year depending on location and ADU value

**Airbnb Host Guarantee:** Airbnb offers $1 million property damage protection, but it's secondary coverage with many exclusions. Don't rely on it as primary insurance.

**Talk to insurance agent specifically about short-term rental coverage** before listing your ADU on Airbnb. Operating STR without proper coverage can void your entire homeowners policy.

## During Construction: Builder's Risk Insurance

**While ADU is being built:**

**Builder's risk insurance** covers the structure during construction from fire, theft, vandalism, storms.

**Who pays:**
Usually your builder includes this in their quote. Verify this - you don't want to assume they have coverage and find out they don't after a loss.

**What it covers:**
- Materials on-site before installation
- Work in progress
- Tools and equipment (sometimes)

**What it doesn't cover:**
- Builder's poor workmanship (that's on the builder)
- Your existing home (your homeowners policy continues)

**Cost:** Usually 1-2% of build cost, often absorbed by builder

**Your responsibility:** Verify builder has adequate insurance before construction starts:
- General liability: $1-2 million minimum
- Workers compensation (if required in your state)
- Builder's risk or equivalent

## Common Insurance Mistakes

**1. Not notifying insurer about ADU**
Building ADU without telling your insurance company can void your entire homeowners policy. One claim, and you discover you have no coverage at all.

**2. Assuming homeowners policy covers rentals**
It usually doesn't. You need specific landlord coverage for rental ADUs.

**3. Under-insuring the ADU**
Insuring $200,000 ADU for only $100,000 means you're under-insured and won't be made whole after major loss.

**4. Not requiring tenant renter's insurance**
Tenant's belongings aren't covered by your policy. When they lose everything in a fire and have no insurance, they may sue you claiming you should have required it.

**5. Operating Airbnb without proper STR coverage**
One guest injury or property damage claim can void your policy and expose you to massive liability.

## How to Get the Right Coverage

**Step 1: Call your current homeowners insurer**

Start here. Tell them:
- You're adding ADU worth $X
- It will be rented / used by family (specify which)
- You need appropriate coverage updates

They'll quote you on updated coverage. Many insurers handle ADUs routinely now.

**Step 2: Compare with 2-3 other insurers**

Insurance rates vary significantly. Get quotes from:
- Major insurers (State Farm, Allstate, Farmers)
- Regional insurers (often competitive)
- Specialty landlord insurance companies (Obie, Steadily)

**Step 3: Verify coverage includes:**

For rental ADUs:
- Dwelling coverage for full ADU replacement cost
- Landlord liability ($500,000+ minimum)
- Loss of rental income coverage
- Property damage by tenants

For family-use ADUs:
- Additional structures or dwelling coverage increase
- Adequate liability coverage
- Loss of use coverage

**Step 4: Add umbrella policy**

Extra $1-2 million liability coverage for $200-$400/year. Do this.

**Step 5: Require tenant renter's insurance**

Put it in lease, verify annually. Their $200/year renter's insurance protects both of you.

## Real Cost Examples

**Non-rental ADU (aging parent lives there):**
- ADU value: $190,000
- Dwelling coverage increase: $190,000
- Annual premium increase: $380
- Total: $380/year

**Long-term rental ADU:**
- ADU value: $210,000
- Dwelling coverage increase: $210,000 ($420/year)
- Landlord liability add-on: $500/year
- Loss of rental income rider: $180/year
- Umbrella policy: $300/year (for whole property)
- Total: $1,400/year

**Short-term rental ADU:**
- ADU value: $220,000
- Specialized STR insurance: $2,200/year
- Umbrella policy: $350/year
- Total: $2,550/year

## Tax Deductibility

**Good news:** Insurance for rental ADUs is tax-deductible as business expense.

**Deductible:**
- Landlord liability coverage
- Loss of rental income coverage
- Property insurance on ADU
- Portion of umbrella policy attributable to rental

**Not deductible:**
- Base homeowners insurance on main house
- Coverage for personal use ADU

Your accountant can help allocate costs properly.

## When Claims Happen

**File claims promptly:**
If ADU has fire, water damage, or tenant causes significant damage, file insurance claim quickly. Document everything with photos.

**Common claims:**
- Tenant causes accidental fire (cooking, candles)
- Water damage from burst pipe or roof leak
- Tenant injury (slip and fall, injury on property)
- Storm damage (wind, hail, fallen trees)
- Vandalism or theft

**Your deductible applies:** Typically $1,000-$2,500 per claim. Factor this into decision to file smaller claims.

## Start With Your Insurance Agent

Before building your ADU, call your insurance agent and discuss your plans. They can:
- Tell you what coverage you'll need
- Quote the additional premium
- Explain any exclusions or limitations
- Recommend proper liability limits

Insurance isn't exciting, but it protects your investment. An ADU represents $150,000-$300,000 of value. Proper insurance ($500-$1,500/year) is cheap protection.

**Your next steps:**

1. Check if your property qualifies for an ADU [property checker link]
2. Get build cost estimates from local builders [builder directory link]
3. Call your insurance agent with ADU details and get updated quote
4. Factor insurance cost into your ADU budget and rental income calculations

Most homeowners find insurance is straightforward once they have the right coverage in place. It's just another operating cost of owning rental property - predictable, manageable, and necessary.