Making room for granny: Home insurance and accessory dwelling units
New York is the latest city to support the construction of accessory dwelling units, or granny flats, to boost housing stock.
In a push to shore up housing stocks, municipalities across the country have loosened regulations around accessory dwelling units (ADU), colloquially known as granny flats or in-law suites.
New York City became the most recent city to toss support behind ADU construction. The city is now running a pilot program that offers residents in single-family homes up to $400,000 to offset the cost of adding a unit over the garage and in an expanded woodshed, PropertyCasualty360.com sister site GlobeSt.com reported.
Angela Orbann, vice president for personal insurance at Travelers Insurance, says homeowners should reach out to their insurance agents when adding an ADU as it will spark a need to adjust coverage since the buildings add value to a property.
According to Travelers, adding an ADU can add as much as 20%-30% to the assessed value of a property.
“If you add an ADU to your property, you will need to add it to your coverage,” Orbann says, continuing: “That’s because your homeowners policy was designed with dwelling coverage limits based on the cost to rebuild the original home — not the home with the new granny flat.”
Attached or detached, that is the question
When seeking insurance for an ADU, the coverage needs will depend on whether the addition is attached or free-stand, and who will be occupying the space, according to Pat Howard, property & casualty insurance expert at Policygenius.com.
Howard explains that if the policyholder added an attached ADU that is occupied by a resident of the home, the insurance needs wouldn’t differ too drastically.
“As is the case after any renovations or additions to your home, you’ll want to inform your insurance provider so they’re able to adjust your dwelling coverage limits accordingly and ensure your ADU is factored into your home’s total rebuilding cost,” he says.
Traveler’s Orbann notes that if the building has separate utilities, coverage might need to be revised to reflect a multifamily home.
If the ADU is detached, Orbann says it would be considered part of a policy’s other structures coverage.
Standard home policy limits for other structures are usually set at 10% of the total dwelling coverage, meaning a policy with $300,000 in dwelling coverage would offer $30,000 in other structures coverage.
This 10% limit might not be enough to rebuild an ADU in the event of a loss, Orbann points out, adding: “Again, a great reason to talk to your insurance agent, as they can help you find the best solution to make sure you have enough coverage to protect your investment in the event of a loss.”
A place for gran or money-making venture?
If the structure is being rented out to a non-relative, the policyholder should consider separate coverage for the renter’s belongings and furniture, Orbann says, noting typically home policies wouldn’t cover these items.
“If renting the structure, this could be considered a business under some policies, so we recommend checking with an insurance representative on how to endorse the policy to cover rental situations,” Orbann says. “You may also be advised to pursue separate landlord coverage.”
According to Howard, standard home policies won’t cover damage or theft of business property and policyholders should discuss additional coverage options to ensure belongings inside the unit are protected.
“If you primarily rent out the ADU through short-term rental websites like Airbnb and Booking, many insurance companies will let you add special home-sharing endorsements onto your home insurance policy for an additional cost,” Howard says. He reiterated that landlord insurance should be sought if the rental will last longer than six months.
Covering the building phase
Homeowners should also speak with an insurance professional about coverage changes for the time the ADU is under construction, according to Howard.
He explains that for ADU projects that are expected to only span a few months, homeowners can add dwelling under construction coverage to an existing property policy.
“If the ADU you have planned is more ambitious in size and scope than, say, a basic tiny home, you’ll likely need to purchase a separate builders risk insurance policy that’s intended for lengthier construction projects,” Howard says.
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