ADUs and Home Insurance: What You Need to Know to Protect Your Investment

By the Mercury Team

There may come a point in your homeownership when your humble abode just isn’t large enough to accommodate your needs, or perhaps you need additional income to help offset mortgage costs. This is where the idea of an accessory dwelling unit (ADU) can become an attractive proposition. In this blog, we’ll explore the ins and outs of ADUs and how homeowners insurance can protect your investment.

What Is an ADU?

An accessory dwelling unit (ADU) is a smaller, separate living or working space that shares the property of a larger primary house. Often referred to as granny flats, in-law units, backyard cottages, or secondary suites, ADUs are usually built in the primary house’s backyard or garage. However, they can also be attached to the primary house or located inside it — e.g., basement or attic conversion.

Accessory dwelling units are becoming increasingly popular among homeowners looking to maximize their property’s potential, whether they be providing a home for a family member, a rental unit to generate additional income, or a flexible space for a home office or studio.

Benefits of ADUs

ADUs offer homeowners several benefits, including:

• Additional income: Renting out an ADU can provide a reliable source of additional income, helping you offset mortgage payments, property taxes, or the costs of building and maintaining the ADU itself.
• Increased property value: Properties with ADUs tend to have higher resale values. An ADU adds considerable appeal to potential buyers who may want an additional living space for family members or as an income-generating rental unit.
• Aging in place: ADUs offer an opportunity for senior citizens to live close to family members while maintaining independence. They can also provide a comfortable space for caregivers to stay nearby.
• Flexibility: ADUs are versatile and can serve various purposes. They can be living spaces for extended family members, workspaces, guest houses, or rental units.

Types of ADUs

Municipalities each have their own rules defining what qualifies as an ADU. Still, there’s a general consensus that an ADU is an additional dwelling situated on the same lot but separate from the main residence. Unlike tiny houses, which fall under a different set of municipal regulations, ADUs are designed to complement the existing residential structure. The zoning laws in your area may dictate the size and type of ADU you can construct, so do your research and contact your local representatives to understand the specific requirements and limitations before beginning your project.

Here are some of the common types of ADUs:

• Interior ADUs: With interior ADUs, you can transform existing spaces within your home into independent living units. Common areas for conversion include your basement and attic.
• Attached ADUs: An attached ADU is when you build an addition to your primary residence to create a new, independent living space.
• Garage ADUs: You can create this ADU by converting your existing garage — whether it’s attached to your home or a separate structure — into a living space. This approach can also include adding a second story to your existing garage, maximizing the use of vertical space.
• Detached ADUs: These ADUs are completely separate from your main house. Whether you’re converting an existing outbuilding, constructing a new unit, or installing a prefabricated structure, detached ADUs provide the greatest level of independence and privacy.

What Does Homeowners Insurance Cover for ADUs?

The specifics of your homeowners insurance coverage can vary based on your policy details and the provider. Here’s a breakdown of typical coverage areas for ADUs under a homeowners insurance policy:

• Dwelling coverage: This part of your homeowners insurance policy typically covers the physical structure of your ADU against damage from insured events such as fire, storms, theft, and vandalism. It’s important to ensure that the coverage limit for dwelling insurance is high enough to cover the cost of rebuilding your ADU in case of total loss.
• Personal property coverage: If your ADU is furnished or contains personal belongings, personal property coverage can protect them from theft or damage. This includes furniture, appliances, electronics, and other personal items within the ADU. Check your policy for specific limits and coverage for high-value items.
• Liability protection: Liability protection is an essential part of homeowners insurance that can extend to your ADU. It protects you if someone gets injured on your ADU property or you’re found liable for property damage. This can cover legal fees, medical bills, and other damages.
• Separate structures coverage: For detached ADUs, your policy’s separate structures coverage is applicable. This covers structures on your property that aren’t attached to your main home, including detached ADUs, garages, and sheds.

What Does Homeowners Insurance Not Cover for ADUs?

While homeowners insurance offers a safety net for many situations, it’s equally important to recognize its limitations, especially when it comes to ADUs. Here are some common exclusions:

• Floods and earthquakes: Certain natural disasters, such as floods and earthquakes, are typically not covered under standard homeowners insurance policies. If your ADU is located in an area prone to these risks, you may need to purchase separate flood or earthquake insurance policies.
• Business activities: If you use your ADU for business purposes, such as a home office, standard homeowners insurance usually won’t cover business-related liabilities or property damage. You must get a separate business insurance policy.
• Pest infestations: Damage from pests, such as termites, rodents, or insects, is generally not covered. You’re expected to manage pest control as part of regular property maintenance.
• Unauthorized or non-permitted work: Insurance companies might deny claims related to the structure or utilities if your ADU was constructed or modified without proper permits. Always ensure work is done legally and with the necessary permits.

Other FAQs

Take a look at some frequently asked questions regarding ADUs.

How Much Do ADUs Cost?

The cost of an ADU can vary widely due to several factors, including size, the type of ADU, materials used, and labor costs. However, according to Angi, the normal range of an ADU costs between $60,000 and $225,000.

Do ADUs Increase Property Value?

According to the National Association of Realtors, a home with an ADU is priced 35% higher on average than a home without one.

What Should You Check with Your Insurance Provider?

Given the unique nature of ADUs, it’s important to:

• Verify inclusions and exclusions: Ensure your policy explicitly includes your ADU and understand what perils are covered.
• Update coverage limits: Assess whether adding an ADU requires increasing your coverage limits.
• Understand policy conditions: Some insurers may have specific conditions or requirements for ADUs, especially if used for rental purposes.

Conclusion

If you’re navigating the complexities of insurance for your ADU, consider reaching out to Mercury Insurance. We can help you find the perfect policy to ensure that your property and all who reside within are well-protected. Mercury also offers affordable, high-quality auto and renters insurance, providing a comprehensive solution for all your insurance needs.

Contact us today for a fast, free quote!