Accessory Dwellings: Insure Or Not?

Accessory dwelling units (ADUs) are standalone living structures that exist separately from, but on the same property as, a main residence. They are often called granny flats, in-law units, or carriage houses. While ADUs are usually covered by homeowners insurance, there are circumstances in which they need to be insured separately.

If the ADU is rented out to a non-family member, for example, landlord insurance is generally required. If the unit is financed or mortgaged, lenders will also typically require insurance. If the ADU is freestanding, it may be covered by other structures coverage, but this may not be sufficient to cover the cost of rebuilding.

In general, it is recommended to consult with an insurance provider to determine the appropriate level of coverage for an ADU, as the requirements can vary depending on state and local laws, who lives in the unit, whether rent is paid, and other factors.

Should insurance policies for accessory dwelling units be dependent on whether they are attached or detached from the main residence?

Accessory Dwelling Units (ADUs) are smaller, separate living or working spaces that share the property of a larger primary house. They are often called granny flats, in-law units, or secondary suites. ADUs can be attached to the primary house or completely separate from the main house.

When it comes to insurance, the type of policy needed for an ADU depends on various factors, including state and local laws, who lives in the unit, whether the occupants pay rent, whether the unit is freestanding or attached, whether it has a separate address, and whether it has its own utilities.

In general, an ADU that is attached to or part of the main house can typically be covered by the homeowner's insurance policy. However, the homeowner will need to inform their insurance company about the ADU to understand how their home insurance will be affected, as the changes will likely result in higher coverage costs.

For freestanding ADUs, some home insurance policies include coverage for "other structures" on the property, which may include detached garages or gazebos. This coverage is usually limited to a certain percentage of the total dwelling coverage. If the occupants of a freestanding ADU are relatives, some insurance carriers may cover the structure under the homeowner's insurance policy, even if the relatives pay rent.

On the other hand, if the detached ADU is rented to a non-family member for an extended period, landlord insurance is typically required. Landlord insurance covers damage to the structure, personal property within the rental unit, liability protection, and reimbursement for lost rental income due to property damage.

Therefore, it is essential for homeowners to understand the specific requirements and limitations of their insurance policies regarding ADUs, especially considering the unique nature of these dwelling units. The insurance policy for an ADU should be dependent on whether it is attached or detached from the main residence, as this can impact the coverage needed and the associated costs.

What are the pros and cons of insuring an ADU as a landlord?

As a landlord, insuring an accessory dwelling unit (ADU) can have several benefits and drawbacks. Here are some pros and cons to help you make an informed decision:

Pros of Insuring an ADU as a Landlord:

• Protection for your investment: Landlord insurance safeguards your ADU investment by covering damage to the structure from perils such as fire, lightning, wind, and hail. It also includes liability protection if a tenant is injured on the property or files a lawsuit.
• Reimbursement for lost rental income: Landlord insurance typically includes coverage for lost rental income if the ADU becomes uninhabitable due to damage from a covered peril.
• Coverage for your personal property: Landlord insurance covers any personal property you own on the rental premises, such as furniture or appliances provided for the tenant.
• Peace of mind for tenants: Providing insurance for your ADU demonstrates your commitment to protecting your tenant's well-being and gives them peace of mind.
• Attracting and retaining tenants: Tenants often look for rental properties with adequate insurance coverage. Offering this assurance can make your ADU more attractive to potential tenants and encourage longer tenancy.

Cons of Insuring an ADU as a Landlord:

• Cost of insurance: Landlord insurance is typically more expensive than standard homeowners insurance, with estimates suggesting it costs about 25% more for the same type of unit. This additional expense should be factored into your budget.
• Exclusions and limitations: Landlord insurance does not cover tenants' possessions. Tenants will need to obtain their own renters insurance to protect their belongings from damage or theft. Additionally, certain exclusions may apply, such as flood and earthquake damage, which would require separate policies.
• Impact on privacy: Operating an ADU as a rental can disrupt your privacy as a homeowner. Renters will have access to certain parts of your property, and you'll need to feel comfortable with tenants coming and going.
• Additional responsibilities: Insuring an ADU as a landlord brings added responsibilities, including maintaining the unit, addressing tenant concerns, and ensuring compliance with landlord-tenant laws.
• Compliance with regulations: State and local regulations regarding ADUs vary, and it's essential to ensure your ADU complies with zoning requirements, dwelling laws, and tax obligations.

How do insurance costs differ for pre-built and self-constructed ADUs?

When it comes to insurance for accessory dwelling units (ADUs), there are a few factors that can influence the cost, including whether the ADU is pre-built or self-constructed.

Insurance Costs for Pre-built ADUs

If you're opting for a pre-built ADU, there are a few insurance options to consider. One option is to add the ADU to your existing homeowners insurance policy, especially if it will be used by family members. However, you may need to extend the limits of your plan to ensure sufficient coverage. If you plan to rent the ADU to non-family members, you will likely need a landlord insurance policy, which typically costs about 25% more than a standard homeowners policy.

Insurance Costs for Self-Constructed ADUs

For those constructing their own ADU, there are a few insurance options to consider during the building process. One option is builders risk insurance, which covers the building under construction and the property used in its construction, such as tools and materials. This type of insurance covers damage caused by fire, severe weather, theft, and vandalism. Another option is to include the ADU in your homeowners insurance policy, especially if it will be used for family members, storage, or a home office. This may require adjusting your coverage limits to ensure adequate protection.

Factors Affecting Insurance Costs

Regardless of whether the ADU is pre-built or self-constructed, several factors can impact the insurance costs:

• Size and location: The size of the ADU and its location can influence the cost of insurance. Larger units may require higher coverage limits, and insurance costs can vary depending on the state and local regulations.
• Use of the ADU: Whether the ADU is for personal use, rental income, or business purposes will affect the type of insurance and the associated costs.
• Construction materials and quality: The materials and quality of construction can impact the insurance costs, as higher-end finishes and specialised construction techniques may require additional coverage.
• Soft costs: These include design, architectural drafting, and engineering fees, which can range from 8-15% of the total project cost.
• Permitting and zoning: The cost of permits and compliance with zoning regulations can vary by location and may impact insurance costs.
• Additional features and systems: ADUs require the installation of electrical, plumbing, and HVAC systems, which can increase the insurance costs compared to a tiny home or finished shed.

In conclusion, the insurance costs for pre-built and self-constructed ADUs can vary depending on a range of factors, including the size, location, use, construction details, and additional features of the unit. It is essential to consult with an insurance provider to determine the specific coverage and costs for your ADU.

How do state and local laws affect insurance requirements for ADUs?

State and local laws can significantly impact the insurance requirements and coverage options for Accessory Dwelling Units (ADUs). Here's how they can affect insurance for your ADU:

• Zoning Laws: Local zoning laws play a crucial role in determining whether you can build an ADU on your property and what type of ADU is permitted. These laws can include restrictions on the size, location, and type of ADU you can construct. It's important to research and understand the specific zoning requirements in your area before starting your project.
• Insurance Requirements: In some states, such as Washington, recent legislation has mandated that insurance carriers must offer coverage for ADUs. This means that insurance companies are required to provide insurance options specifically for ADUs, making it easier for homeowners to obtain the necessary coverage.
• Coverage Limits: State and local laws can influence the coverage limits and exclusions for ADUs under homeowners insurance policies. For example, in Washington, insurance policies typically include coverage for \"other structures\" on the property, which may include detached ADUs. However, this coverage is usually limited to a certain percentage of the total dwelling coverage.
• Occupancy and Rental Restrictions: Local laws can dictate who can occupy an ADU and whether it can be rented out. For instance, some areas may require the owner to occupy either the main residence or the ADU. Understanding these restrictions is essential, as they can impact the type of insurance you need. If you plan to rent out your ADU, you will generally need landlord insurance, which offers different coverage than a standard homeowners policy.
• Building and Safety Standards: State and local governments set building and safety standards that ADUs must comply with. These standards can include requirements for fire safety, structural integrity, and accessibility. It's important to ensure your ADU meets these standards, as non-compliance could result in denied insurance claims or increased insurance costs.
• Impact on Property Taxes: Adding an ADU to your property may increase your property taxes, which is a crucial consideration when assessing the overall financial impact of constructing an ADU. Higher property taxes may also influence your insurance costs, as insurance premiums are often based on the value of the property.
• Permitting and Reporting: Most areas require permits and reporting to the local government when constructing an ADU. Failing to obtain the necessary permits or comply with reporting requirements can have implications for your insurance coverage. Insurance companies may deny claims related to the structure or utilities if your ADU was built or modified without the proper permits.

What are the insurance implications of using an ADU as a home office?

Using an accessory dwelling unit (ADU) as a home office can have several insurance implications that you should be aware of. Here are some key points to consider:

Insurance Coverage for ADUs

Firstly, it's important to understand the insurance coverage options for ADUs. ADUs can be insured under your homeowners insurance policy or as a separate rental dwelling policy, depending on certain factors. If your ADU is attached to your primary dwelling, it can typically be covered under your existing homeowners insurance policy, even if you rent it out. On the other hand, if your ADU is detached from your home and rented to a non-relative, it usually requires a separate rental dwelling policy with its own address. This type of policy provides coverage for potential losses related to renting, such as liability or damage to furnishings.

Business Activities Exclusion

It's important to note that standard homeowners insurance policies typically exclude coverage for business-related activities. If you plan to use your ADU as a home office, you may need to purchase a separate business insurance policy to ensure you're covered for any business-related liabilities or property damage. This is because homeowners insurance is generally designed for personal use, and business activities are considered outside the scope of this coverage.

Dwelling Coverage

Dwelling coverage is an essential aspect of insurance for ADUs. It protects the physical structure of your ADU against damage from insured events such as fire, storms, theft, or vandalism. When insuring your ADU, ensure that the coverage limit for dwelling insurance is sufficient to cover the cost of rebuilding or repairing your ADU in case of total or partial loss. This is particularly important if your ADU has unique features or construction materials that may increase rebuilding costs.

Personal Property Coverage

If your ADU serves as your home office, you likely have furniture, electronics, and other valuable items inside. Personal property coverage can protect these belongings from theft or damage. This type of coverage is especially important if you have expensive equipment or inventory related to your business stored in your ADU. Be sure to review the specific limits and exclusions of your policy to ensure your valuable items are adequately covered.

Liability Protection

Liability protection is another crucial aspect of insurance for ADUs used as home offices. It protects you in the event someone is injured on your ADU property or if you're found liable for property damage. This coverage can include legal fees, medical bills, and other associated damages. As a home office may involve visitors, clients, or employees, having adequate liability protection is essential to safeguard yourself and your business.

Updating Coverage and Consulting Professionals

When using an ADU as a home office, it's important to update your insurance coverage accordingly. Contact your insurance provider and inform them about the change in usage. They can guide you in adjusting your coverage limits or purchasing additional policies, such as business insurance, to ensure you're adequately protected. Insurance professionals can also advise you on any specific requirements or exclusions related to ADUs in your area.

In summary, using an ADU as a home office has several insurance implications. It's important to understand the coverage options, exclusions, and limitations of your homeowners insurance policy. By taking the necessary steps to update your coverage and consult with insurance professionals, you can ensure that your ADU, along with your business assets and activities, are adequately protected.

Frequently asked questions