Accessory dwelling units and short-term rentals: What is and isn't covered

Key Takeaways

• Match your insurance needs to your ADU's use, whether that's personal, rental, or short-term.
• If you're not sure if your ADU has coverage under your homeowners insurance policy, check with your insurer.
• When renting out your ADU, umbrella insurance is vital coverage to have, providing protection against unexpected property and liability risks.

What is an accessory dwelling unit?

An ADU is a secondary, self-contained living space located on the same lot as a primary single-family residence. It's designed to function as an independent home, complete with its own kitchen, bathroom, sleeping area, and entrance.

For example, let's say Patrick owns a home with a very spacious backyard. Taking advantage of the extra room, he builds a small cottage behind his main house. This cozy unit serves a dual purpose because it can be rented out for additional income or used as a private space for visiting family members. Since the cottage is a self-contained living space located on the same property as his primary residence, it qualifies as an accessory dwelling unit or ADU.

Other examples of ADUs include:

• A converted garage with a kitchenette and bathroom
• A basement apartment with its own entrance
• A tiny home placed on the same lot as a main house

With ADUs, the main home on the property is considered the primary residence, typically where the owner lives. The ADU is a secondary dwelling that shares the same parcel and utilities as the main home, and it cannot be sold separately.

Is an ADU the same as a guest house?

Not quite. A guest house is typically designed for short-term stays and may not include full amenities such as a kitchen, bathroom, or a private entrance. An ADU, on the other hand, is a fully equipped, self-contained living space that is intended for long-term use.

Guest houses that are used occasionally are typically considered to be part of the primary residence by insurance companies and therefore, pose less risk than an ADU.

Will my home insurance cover my ADU?

When it comes to insurance, whether your ADU is covered under your homeowners insurance policy depends on how it is built and used. In general, an ADU may be covered by your homeowners insurance if:

• It's an attached or an interior ADU, such as a basement apartment or garage conversion. The reason is that this type of ADU is typically considered part of your home's main dwelling and therefore, can be covered under your existing policy, especially if used by family members.
• A detached ADU (such a backyard cottage) that is covered under the “other structures” portion of your homeowners insurance. If your policy covers other structures, it is usually limited to a percentage of your dwelling coverage (which is typically 10%) and may not be enough to rebuild if the ADU is damaged.

In many cases, ADUs require insurance coverage beyond what is typically provided by a standard homeowners policy, especially when used as long-term rentals. Renting out an ADU often necessitates landlord or rental property insurance to protect against tenant-related risks, property damage, and liability. It's best to keep in mind that if your ADU has separate utilities or its own address, some insurers may view it as a standalone structure, which could require you to secure a separate policy.

If you're unsure whether your ADU is covered under your current homeowners insurance, it's best to consult your insurer directly.

What’s the difference between a personal home insurance policy, landlord/short term rental policy, and umbrella insurance for an ADU?

A personal homeowners insurance policy is generally best when your ADU is used by you or close family members. If the ADU is attached to your home—such as a basement or garage conversion—it may be covered under your existing policy. Detached ADUs might fall under the “other structures” portion.

Landlord and short-term rental insurance becomes necessary when you rent out your ADU—such as a long-term rental or through a platform like Airbnb. It covers property damage, liability, and loss of rental income if you have a covered loss. For short-term rentals, some insurers may offer home-sharing endorsements, while others may require a business insurance policy.

Umbrella insurance provides an extra layer of liability protection that kicks in when claims exceed the limits of your current homeowners or landlord policy. This is especially critical if you rent out your ADU or regularly host guests as it covers a broader range of incidents and provides a financial safety net in case of a major lawsuit.

How do I get insurance for my ADU?

Getting insurance for your ADU involves a few key steps, with coverage depending on how it's built and used.

1. Inform your insurance provider that you've built or plan on building an ADU. This includes details such as whether it's attached or detached, who will live there, and if you'll be renting it out.
2. Determine the type of coverage you need. If your ADU is used for family (such as housing a relative in a basement or garage conversion), it may be covered under your existing homeowners policy. However, if you're renting the unit to non-family members, you'll likely need additional coverage to address tenant-related risks, property damage, and liability. For detached ADUs, check whether they can be included under the “other structures” portion of your policy. If coverage limits are too low to fully protect the ADU, you may need to increase your limits or consider a separate policy.
3. Know your local regulations. Zoning laws and building codes can directly impact whether your ADU is insurable. To avoid coverage issues, make sure your unit complies with all local requirements by checking with your city or county's planning department.
4. Ask about policy endorsements, extra coverage, and riders. Many insurers offer optional add-ons to your existing homeowners policy that can expand coverage for ADU-specific needs, such as rental income protection, increased liability limits, or enhanced rebuilding costs. These can include:
   • Rental property endorsements to cover tenant-related risks such as property damage, liability, and loss of rental income.
   • Other structures endorsement that increases coverage limits for detached ADUs beyond the standard 10% of dwelling coverage.
   • Liability extension rider that expands liability protection to include incidents occurring in or around your ADU.
   • Loss of use or income endorsement that pays you if the ADU isn’t able to be used due to a covered loss, forcing you to miss out financially on rental income.
   • Building ordinance or law coverage to help pay for upgrades required by new building codes during repairs or rebuilding of your ADU.
   • Separate dwelling endorsement that treats the ADU as a separate living space with its own coverage terms, especially if you have a detached building with its own utilities.

   Take Note! These types of homeowner policy options vary by insurer, so it's a smart idea to ask your provider which endorsements are available and which best match your ADU's setup and usage.

5. Compare quotes. Not all insurers treat ADUs the same. Shop around to find a policy that fits your setup, usage, and budget.