ADU Insurance: What Coverage Do You Actually Need?

ADU Insurance: What Coverage Do You Actually Need?

Building an Accessory Dwelling Unit is a major investment, and protecting that investment with the right insurance coverage is essential. But ADU insurance can be confusing because it does not fit neatly into a single insurance category. Depending on how you use your ADU (rental income, family housing, home office), you may need different types of coverage, and your existing homeowner's policy may or may not extend to the new structure.

In this guide, we will walk through every type of insurance coverage you may need for your ADU, from construction through occupancy. We will explain the differences between homeowner's extensions and standalone landlord policies, cover liability considerations unique to ADU properties, and help you understand what you are really paying for.

Insurance During ADU Construction

Your insurance needs begin before the ADU is even finished. During construction, you face risks including property damage, worker injuries, theft of materials, and liability for accidents on the construction site.

Builder's Risk Insurance

Builder's risk insurance (also called course of construction insurance) covers the ADU during construction against damage from fire, wind, vandalism, theft, and other covered perils. This policy covers the structure being built, including materials and supplies on site.

Important: Verify that your general contractor carries builder's risk insurance AND workers' compensation insurance. Ask for certificates of insurance (COIs) and verify them with the insurer. California law requires all employers (including contractors) to carry workers' compensation insurance. The California Contractors State License Board (CSLB) allows you to verify a contractor's license and insurance status online.

Your Existing Homeowner's Policy During Construction

Contact your homeowner's insurance company before construction begins. You need to:

• Notify them of the construction project
• Ask whether the construction activity affects your current coverage
• Inquire about any temporary endorsements needed during construction
• Confirm that your liability coverage extends to the construction site

Some homeowner's policies automatically extend coverage to new construction on the property, while others require a specific endorsement. Failing to notify your insurer could result in a denied claim if something goes wrong during construction.

Option 1: Homeowner's Policy Extension

The simplest and often least expensive approach to insuring your ADU is to extend your existing homeowner's policy. This works best when the ADU is used for personal purposes (family member housing, home office, guest suite) rather than as a rental property.

How It Works

You contact your homeowner's insurance company and add the ADU as an additional structure to your policy. Most homeowner's policies already include "Other Structures" coverage (Coverage B) that automatically provides 10% of your dwelling coverage limit for detached structures like garages, sheds, and fences.

However, 10% of your dwelling coverage is usually not enough for an ADU. For example, if your main house is insured for $500,000, your automatic Other Structures coverage would be $50,000, far below the replacement cost of most ADUs. You will need to increase Coverage B to reflect the actual replacement cost of the ADU.

What It Covers

Cost

Extending your homeowner's policy to fully cover an ADU typically adds $300-800 per year to your premium, depending on the ADU's size, construction type, and replacement cost. This is significantly less than a separate landlord policy.

Limitations

A homeowner's extension may not provide adequate coverage if you are renting the ADU. Most homeowner's policies are designed for owner-occupied properties and may exclude or limit coverage for rental activities. If you plan to rent your ADU, consider a standalone landlord policy or a specific rental dwelling endorsement.

Option 2: Standalone Landlord (Dwelling Fire) Policy

If you are renting your ADU to a tenant, a standalone landlord policy (also known as a dwelling fire policy or DP-3 policy) provides more comprehensive coverage than a homeowner's extension. This type of policy is specifically designed for rental properties.

What It Covers

• Structure: The ADU building and permanent fixtures against fire, wind, hail, lightning, and other covered perils
• Liability: Claims against you as a landlord for injuries or property damage occurring in or around the ADU
• Loss of rental income: If the ADU becomes uninhabitable due to a covered loss, the policy covers lost rent during the repair period
• Medical payments: Small medical claims from guests or visitors injured on the property (regardless of fault)

Cost

A standalone landlord policy for an ADU typically costs $500-1,500 per year, depending on the ADU's replacement value, location, and coverage limits. This is more expensive than a homeowner's extension but provides significantly better coverage for rental situations.

Recommended Coverage Limits

Umbrella Insurance

Given that your ADU tenant lives on your property, an umbrella insurance policy is strongly recommended. Umbrella insurance provides additional liability coverage above and beyond your homeowner's and landlord policy limits.

For example, if your landlord policy has $300,000 in liability coverage and a tenant's guest is seriously injured on your property, the medical bills and potential lawsuit could easily exceed $300,000. An umbrella policy would cover the excess, up to the umbrella policy limit (typically $1 million to $5 million).

Umbrella policies are surprisingly affordable, typically costing $150-400 per year for $1 million in coverage. Most insurance professionals recommend at least $1 million in umbrella coverage for landlords, with higher limits for those with significant assets to protect.

Requiring Tenants to Carry Renters Insurance

California law allows landlords to require tenants to carry renters insurance as a condition of the lease. This is a smart move for ADU landlords for several reasons:

• Protects tenant's belongings: Your landlord policy does not cover your tenant's personal property. Renters insurance covers their furniture, electronics, clothing, and other belongings.
• Provides liability coverage: If your tenant causes a fire or water leak that damages your ADU, their renters insurance can help cover the cost.
• Reduces your exposure: When a tenant has their own insurance, they are less likely to file claims against your policy for issues that are covered by theirs.
• Affordable: Renters insurance typically costs $15-30 per month, a small price for significant protection.

Include a renters insurance requirement in your lease agreement and require proof of coverage before move-in and annually thereafter.

Special Insurance Situations

Short-Term Rental Insurance

If you are renting your ADU on Airbnb or VRBO (in cities where it is allowed), you need specialized short-term rental insurance. Standard homeowner's and landlord policies typically exclude short-term rental activity. Options include Proper Insurance, CBIZ, and Safely, which are designed specifically for short-term rental properties. See our guide on renting your ADU on Airbnb in California for more details.

Earthquake Insurance

Standard homeowner's and landlord policies in California do not cover earthquake damage. Given California's seismic activity, earthquake insurance is worth considering for your ADU. The California Earthquake Authority (CEA) offers earthquake policies through participating insurers. Premiums for earthquake insurance vary widely based on location, construction type, and deductible, but typically range from $800 to $5,000 per year for residential properties.

Flood Insurance

If your property is in a FEMA-designated flood zone, you may need flood insurance. Like earthquake coverage, flood damage is excluded from standard policies. The National Flood Insurance Program (NFIP) and private flood insurers offer separate flood policies. Check FEMA's flood map to determine your property's flood risk.

Frequently Asked Questions

Does my regular homeowner's insurance cover my ADU?

Partially. Most homeowner's policies include "Other Structures" coverage (Coverage B) that provides automatic coverage up to 10% of your dwelling limit. However, this is usually insufficient for an ADU's full replacement cost. You will need to increase Coverage B or add a specific endorsement. Contact your insurer to discuss your options before or during ADU construction.

Do I need a separate insurance policy for my ADU?

If you are using the ADU for personal purposes (family housing, home office), a homeowner's policy extension is usually sufficient. If you are renting the ADU to a tenant, a standalone landlord (dwelling fire) policy or a rental dwelling endorsement is recommended for more comprehensive coverage.

How much does ADU insurance cost per year?

Costs vary widely based on the type of coverage. A homeowner's policy extension typically adds $300-800/year. A standalone landlord policy costs $500-1,500/year. An umbrella policy adds $150-400/year for $1 million in additional liability coverage. Total annual insurance cost for a rented ADU is typically $800-2,000.

Will my insurance cover an unpermitted ADU?

Many insurers will not cover unpermitted structures, or they may exclude them from coverage. If a loss occurs involving an unpermitted ADU, your insurer could deny the claim entirely. Always ensure your ADU has proper permits before seeking insurance coverage. See our article on unpermitted ADUs and home sales.

What if my tenant is injured in the ADU?

Your liability coverage (from your homeowner's extension, landlord policy, or umbrella policy) would cover medical expenses and potential lawsuits if the injury resulted from a condition you are responsible for (such as a structural defect or failure to maintain the property). This is why adequate liability coverage is essential for ADU landlords.

Should I require my ADU tenant to have renters insurance?

Absolutely. Requiring renters insurance is one of the smartest moves you can make as an ADU landlord. It protects your tenant's belongings, provides them with liability coverage, and reduces your exposure. California law allows landlords to require renters insurance as a lease condition.

ADU Insurance Claims Process: A Step-by-Step Walkthrough

Knowing how to file an insurance claim for your ADU before you actually need to is essential for California homeowners. The claims process can feel overwhelming during a stressful event, so understanding each step in advance helps you respond quickly and maximize your payout.

Step 1: Document the Damage Immediately

As soon as it is safe to do so, take photographs and video of all damage to the ADU from multiple angles. Document the interior and exterior, including structural damage, water intrusion, broken fixtures, and damaged personal property. If a tenant's belongings are affected, encourage them to document their own losses separately for their renter's insurance claim.

Step 2: Prevent Further Damage

Your insurance policy requires you to take reasonable steps to prevent additional damage. This might include covering a damaged roof with a tarp, turning off the water supply if pipes have burst, or boarding up broken windows. Keep receipts for any emergency materials or services you purchase, as these costs are typically reimbursable under your policy.

Step 3: Contact Your Insurance Company

Report the claim to your insurer as soon as possible, ideally within 24 to 48 hours of the incident. Most insurers offer 24-hour claim reporting by phone or through their mobile app. Provide a brief description of the damage and the date and time of the incident. The insurer will assign a claim number and schedule an adjuster visit.

Step 4: Meet with the Insurance Adjuster

An insurance adjuster will visit your property to inspect the damage and estimate repair costs. Be present during this inspection to walk the adjuster through all affected areas and share your documentation. If you have contractor estimates for repairs, provide these to the adjuster for comparison. Do not begin permanent repairs until the adjuster has completed their inspection.

Step 5: Review and Negotiate the Settlement

After the inspection, the insurer will issue a settlement offer based on the adjuster's findings. Review this offer carefully and compare it to your own contractor estimates. If the offer seems low, you have the right to negotiate. Provide additional documentation, get a second contractor estimate, or hire a public adjuster to advocate on your behalf. California law protects policyholders from unfair claims practices, and you can file a complaint with the California Department of Insurance if you believe your claim is being handled improperly.

Common Insurance Exclusions ADU Owners Should Know

Understanding what your ADU insurance policy does not cover is just as important as knowing what it does cover. These common exclusions catch many California homeowners by surprise.

Flood Damage

Standard homeowner's and landlord insurance policies do not cover flood damage. If your ADU is in a flood-prone area, you need a separate flood insurance policy through the National Flood Insurance Program (NFIP) or a private flood insurer. Even if your property is not in a designated flood zone, consider flood coverage if your area is susceptible to heavy rain or poor drainage.

Earthquake Damage

Earthquake damage is excluded from standard insurance policies in California. Given the seismic activity throughout the state, earthquake insurance is strongly recommended for any property with an ADU. The California Earthquake Authority (CEA) offers policies through participating insurers. Premiums vary based on your location, construction type, and deductible selection.

Wear and Tear

Insurance covers sudden and accidental damage, not gradual deterioration. If your ADU's roof leaks because it was not maintained, or the plumbing fails due to age, these claims will likely be denied. Regular maintenance and prompt repairs are your responsibility as the property owner and are essential for keeping your ADU in insurable condition.

Tenant-Caused Intentional Damage

While accidental damage caused by tenants is generally covered under your landlord policy, intentional or malicious damage may be excluded or subject to limitations. Thorough tenant screening and a solid lease agreement are your best defenses against intentional damage.

Business Use

If your tenant operates a business out of the ADU, your standard landlord policy may not cover business-related claims. This includes liability for customers visiting the ADU, damage to business equipment, and business interruption losses. If you allow commercial use, require the tenant to carry their own commercial liability insurance.

Frequently Asked Questions About ADU Insurance

Does my existing homeowner's insurance cover my ADU?

In most cases, your standard homeowner's insurance does not automatically cover a new ADU. You will need to contact your insurer to add the ADU to your policy, either as an endorsement to your existing policy or as a separate landlord or dwelling policy. The cost of adding ADU coverage varies but typically ranges from $500 to $1,500 per year depending on the unit's size, construction quality, and coverage limits.

Do I need landlord insurance if I rent my ADU to a family member?

Yes, even if your tenant is a family member, you should have appropriate insurance coverage for the ADU. If a family member or their guest is injured in the unit, your standard homeowner's policy may not cover the claim if the insurer was not informed about the ADU occupancy. Landlord insurance provides liability protection and property coverage specifically designed for rental situations, including family member arrangements.

Should I require my ADU tenant to have renter's insurance?

Absolutely. Requiring renter's insurance as a condition of the lease is standard practice and protects both you and your tenant. Renter's insurance covers the tenant's personal belongings, provides liability protection if they cause damage or injury, and covers temporary living expenses if the ADU becomes uninhabitable. Most renter's policies cost $15 to $30 per month, making it an affordable requirement for tenants.

What is the difference between replacement cost and actual cash value coverage?

Replacement cost coverage pays to repair or rebuild your ADU at current construction prices without deducting for depreciation. Actual cash value coverage deducts depreciation from the payout, meaning you receive less as the ADU ages. Replacement cost coverage is more expensive but provides significantly better protection, especially for newer ADUs where the replacement cost is close to the original construction cost.

How often should I review my ADU insurance coverage?

Review your ADU insurance policy annually, or whenever you make significant improvements to the unit. Construction costs in California increase regularly, and your coverage limits should keep pace. If you renovate the ADU, add features like solar panels, or increase the rental rate, update your coverage to reflect the current replacement cost. An annual review with your insurance agent takes about 30 minutes and ensures you are neither underinsured nor overpaying for coverage you do not need.