Thinking About Building an ADU? Don’t Forget the Insurance.
Accessory Dwelling Units (ADUs), also known as granny flats, backyard homes, guest houses, or in-law units, have become increasingly popular throughout California. With rising home prices and housing shortages, many homeowners are building ADUs to create rental income, provide housing for family members, or increase their property’s value.
However, many homeowners are surprised to learn that adding an ADU can significantly impact their homeowners insurance.
Before you build or rent out an ADU, it’s important to understand how it affects your insurance coverage.
What Is an ADU?
An ADU (Accessory Dwelling Unit) is a secondary residential unit located on the same lot as a primary residence.
Common examples include:
- Detached backyard cottages
- Converted garages
- Above-garage apartments
- Attached in-law suites
- Converted basements
California has made it easier than ever for homeowners to build ADUs, but insurance companies often require updates to your policy once construction is complete.
Insurance Issues We See Most Often
1. Increased Replacement Cost
When you add an ADU, you’ve increased the amount of structure that must be rebuilt after a covered loss.
Many homeowners forget to notify their insurance company after construction is completed.
If your dwelling coverage isn’t updated, you may be underinsured.
ADU Property Example
7
Your insurance carrier may require:
- Updated square footage
- Construction details
- Building permit information
- Updated replacement cost estimate
2. Rental Income Changes Everything
If you’re renting your ADU to tenants, your insurance needs may change significantly.
Questions insurance companies typically ask include:
- Is the ADU owner-occupied?
- Is it rented long-term?
- Is it used as an Airbnb or short-term rental?
- Is rent collected monthly?
The answers can affect whether a standard homeowners policy is appropriate or whether additional landlord coverage is needed.
3. Liability Exposure Increases
Every additional resident on your property creates additional liability exposure.
Examples include:
- Tenant injuries
- Slip-and-fall accidents
- Dog bite claims
- Property damage claims
Many homeowners choose to increase their liability limits or add an umbrella policy after building an ADU.
4. Detached Structures May Need Separate Consideration
Garage Conversion ADUs
6
Not all detached structures are automatically insured for their full value.
Many homeowners policies provide limited “Other Structures” coverage, often around 10% of the dwelling limit.
For example:
- Home Coverage A: $800,000
- Other Structures Coverage: $80,000
If your new ADU costs $250,000 to rebuild, additional coverage may be needed.
5. Short-Term Rentals May Require Special Coverage
Many homeowners use ADUs for:
- Airbnb
- VRBO
- Vacation rentals
Most standard homeowners policies have restrictions regarding short-term rentals.
If you’re planning to rent your ADU on Airbnb or similar platforms, talk with your insurance agent before listing the property.
ADU Insurance Checklist
Before building or renting out an ADU:
✅ Notify your insurance company
✅ Update your dwelling coverage
✅ Review your liability limits
✅ Consider an umbrella policy
✅ Discuss rental use with your agent
✅ Verify replacement cost calculations
✅ Confirm coverage for detached structures
We Help California Homeowners Insure ADUs
Whether you’re building a new ADU, converting a garage, or renting an existing unit, it’s important to make sure your insurance policy properly reflects the changes to your property.
At Starwest Insurance Services, we help homeowners throughout California review their coverage and identify potential gaps before a claim occurs.
Get an ADU Insurance Review Today
Thinking about building an ADU or already have one?
Let us review your homeowners insurance and make sure your property is properly protected.
James Cq Banh
Starwest Insurance Services
📱 Text me at 714-867-7799 or call the office 714-893-7271
No broker fees since 1995.
Serving homeowners throughout Orange County, Los Angeles County, Riverside County, San Bernardino County, and San Diego County.