Accessory dwelling units will test agents’ ingenuity
As “dwellings within dwellings” or “households within households,
” ADU arrangements produce countless complexities
that agents and brokers must be prepared to address … .
By Joseph S. Harrington, CPCU
Young people, priced out of rental housing, are returning home after college. Joining them are retirees for whom the cost of assisted living facilities is beyond their reach. People of all ages and walks of life find themselves unable to afford housing in many metro areas.
In response, states and municipalities are acting to relax local zoning regulations to allow the creation of “accessory dwelling units,” or ADUs. Also referred to as “in-law apartments,” “granny flats,” or coach houses, ADUs are separate living quarters added onto existing structures or built separately on the same lots as existing dwellings.
California provides the most dramatic example of the recent growth in ADUs.
Since the state passed a law in 2016 to relax the application of local density restrictions, the number of permits for ADUs grew from about 2,000 that year to nearly 20,000 in 2021—and the number keeps rising.
Several other states and major cities have passed statutes or ordinances authorizing the creation of ADUs.
New risk, old forms
While property/casualty insurers have long covered unique living situations on an individual basis, a mass market of ADUs would be a new class of risk.
To date, there hasn’t been the time and experience to develop standardized policy provisions and rating to reflect the general risk profile of ADUs. Until that happens, personal lines agents and brokers will have to adapt forms developed for other types of residential risk.
Producers today see advice to the effect that an ADU living arrangement can be insured more or less adequately under a standard owner-occupied coverage form, such as an HO-3, provided that:
- The dwelling limit is adjusted to reflect the value of an ADU added onto the principal residence; or
- The “other structures” limit is adjusted to reflect the value of an ADU added onto another structure (e.g., a garage) or constructed separately as a stand-alone building.
If the named insured plans to rent the ADU on a short-term basis through an online network, standard endorsements are now available to extend property and liability coverage to such use. If the named insured wants to rent the ADU on an indefinite basis, he or she is advised to acquire a landlord’s policy, which is generally available for one to four unit dwellings where the named insured resides in one of the units.
Dwelling in a dwelling
The approaches described above, while workable for most situations, don’t reflect the essential qualities that set most ADUs apart from other living arrangements.
As “accessory” dwellings, ADUs are not completely independent homes. Their risk profile is distinct from but integrated into that of the “host” dwelling and household to a degree not anticipated by owner-occupied, unit-owners, or renters forms.
As “dwellings within dwellings” or “households within households,” ADU arrangements produce countless complexities that agents and brokers must be prepared to address, including:
- How are ownership interests in the ADU established? Is it necessary or advisable to insure the ADU with a separate homeowners or dwelling form?
- Is it advisable for a “tenant” occupying an ADU, even if he or she is a relative paying no rent, to acquire a renters form to cover personal property and premises liability? How then would coverage and limits be allocated among the different policies applying to the property?
- If an ADU is insured within the parameters of a single owner-occupied coverage form, how will coverage apply (or not) to business activities and personal liability of the various occupants?
As indicated above, none of this is entirely new. People have been insuring unusual living situations for decades.
What’s new is that the popularity of ADUs is likely to spawn a surge of new arrangements that will tax the imagination of producers until a standardized approach is adopted.
The author
Joseph S. Harrington, CPCU, is an independent business writer specializing in property and casualty insurance coverages and operations. For 21 years, Joe was the communications director for the American Association of Insurance Services (AAIS), a P-C advisory organization. Prior to that, Joe worked in journalism and as a reporter and editor in financial services.
