Do You Need Special Insurance for an ADU?

Most homeowners think about insurance after the ADU is finished. The two moments that actually matter are earlier than that: before the first shovel, and the day the unit is done. Here is what applies at each, and the one gap that catches people out.

We build backyard homes, we don't sell policies — treat this as the list of questions to take to your agent, not advice on your specific cover.

During construction

Three separate things should be in place, and only one of them is yours:

• Builder's risk. Covers the structure while it is going up — fire, theft of materials, weather damage to work in progress. Confirm who carries it on your project and what it covers, because an unfinished building is not covered the way a finished one is.
• Your contractor's general liability. Covers damage or injury arising from their work. Ask for a certificate of insurance naming the amount and the dates — not a verbal assurance.
• Registration, bond and workers' comp. In Washington, contractors must be registered with the Department of Labor & Industries and carry a bond and liability coverage. L&I publishes a free contractor lookup where you can check registration status, the bond, insurance and any history — before you sign anything.

That last one is the single most useful ten minutes in the whole hiring process, and it is public. Our registration is DIGSES*775LE, and you should look up ours and everyone else's you talk to. More on vetting in how to choose an ADU contractor.

Also worth telling your own insurer that construction is happening. Some policies have conditions around vacant structures or major work on the property, and a surprise is much cheaper to avoid than to argue about.

After it's built: the “other structures” trap

This is the part that surprises people. On a standard homeowners policy, a detached building on your lot usually falls under “other structures” coverage — the category built for a garden shed, a fence or a detached garage. That limit is commonly set as a percentage of your main dwelling coverage, and the default is frequently nowhere near the cost of rebuilding a finished DADU.

A backyard home that cost what a DADU actually costs to build is not a shed, and the default limit will not rebuild it. The fix is simple but it has to be asked for: tell your carrier the unit exists, tell them what it cost, and get the coverage raised — or the ADU scheduled separately — to a figure that would genuinely rebuild it.

Do this when the unit is finished, not years later. Policies pay against the limits in force when the loss happens, not the ones you meant to update.

If you rent it out

Renting changes the risk, and a standard homeowners policy is generally not written for a tenant-occupied unit. Expect to discuss:

• A landlord or rental-dwelling endorsement covering the rented unit.
• Liability cover sized for having a tenant and their visitors living on your property.
• Loss-of-rent cover, so the income continues if the unit becomes uninhabitable after a covered loss.
• Requiring your tenant to carry renters insurance — their belongings are not your policy’s problem, and it is normal to put this in the lease.
• An umbrella policy, which is often inexpensive relative to the liability it adds.

Short-term renting is a different conversation again, and many standard policies exclude it outright. If that is the plan, say so to your agent before you book anyone. The rest of the rental picture is in renting out your ADU and how much rent an ADU earns.

Why permitted work matters here too

Insurers, like appraisers and lenders, care whether the unit was permitted and inspected. Unpermitted construction is a common basis for a claim dispute, and it is one more reason the inspection record is worth having. It is the same documentation that makes the unit count when you eventually sell.

A short checklist

• Before signing: look the contractor up in the L&I registry and ask for a certificate of insurance.
• Before breaking ground: confirm who carries builder’s risk, and tell your own insurer work is starting.
• At completion: tell your carrier the unit exists and raise the structure limit to a real rebuild figure.
• Before a tenant moves in: add landlord and liability cover, and require renters insurance in the lease.
• Keep the permit and final inspection records with your policy documents.

Ask us the build questions, ask your agent the policy ones

We can tell you what the unit will cost to build and hand you the permit and inspection record that your insurer will want — your agent sets the limits. If you are still working out whether the project makes sense at all, start with the downsides of an ADU or send us your address.