Ten Percent of the House: Why Your Homeowners Policy Was Not Written for the ADU in Your Backyard

The family builds a $240,000 cottage for a parent behind a house insured for $450,000. Nobody calls the insurance agent, because the policy renews automatically and the premium gets paid. Two winters later a space heater starts a fire and the cottage is a total loss. The claim comes back at $45,000, because the policy's other structures coverage was set at ten percent of the dwelling limit on the day it was written, and nobody ever told the carrier there was a dwelling in the backyard. The number on that check is not a dispute. It is the contract working exactly as written. Every dollar of the $195,000 difference was available for a phone call and a modest premium increase, two years earlier, from an agent who was never invited to the project.

Ten Percent Is a Default, Not a Decision

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The standard homeowners form used across the industry, the HO-3, separates the house (Coverage A, Dwelling) from everything else on the lot that is not attached to it (Coverage B, Other Structures). Coverage B is set automatically, and the industry default is ten percent of the Coverage A limit. A house insured for $450,000 carries $45,000 for the detached garage, the shed, the fence, and, unless someone changes it, the cottage.

That default was designed for garages. It was never designed for a dwelling with a kitchen, a bathroom, a heating system, and a person living in it. A detached ADU in New England routinely costs more than the default Coverage B limit on the main house by a factor of three to five. The fix is ordinary: the agent raises the Coverage B limit to the replacement cost of the ADU, or schedules the structure separately, and the premium adjusts. The failure is equally ordinary: nobody asks.

An attached or interior ADU has the opposite problem. The addition or the finished basement becomes part of the dwelling, so it falls under Coverage A, and the Coverage A limit was set for the house without it. Most policies carry a replacement cost provision that reduces the payout on any loss if the dwelling is insured for less than a stated percentage of its full replacement cost, commonly eighty percent. A $150,000 basement conversion on a house insured for $450,000 can quietly pull the house below that line, so that even a kitchen fire upstairs pays less than it should. The agent re-runs the replacement cost estimate with the ADU in it and raises Coverage A to match.

These figures are invented teaching assumptions. The percentages and forms vary by carrier, and some policies set Coverage B differently or exclude structures used as dwellings altogether. The only number that matters is the one on your declarations page, which is why the agent reads it with you.

Tell the Carrier What the Building Is

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Every homeowners policy is written for a described risk: a one-family dwelling, occupied by the named insured and the insured's household, used as a residence. An ADU changes the description. The property now has two dwelling units. One may be occupied by someone who is not a member of the household. It may be rented. Each of those facts affects how the carrier would have rated the policy, and policies contain conditions requiring the insured to disclose material changes in the risk.

Here is the part families do not hear often enough. A carrier that learns of an undisclosed second dwelling after a loss has, in many policy forms, the right to argue misrepresentation or a material change it was never told about, and that argument can reach the entire claim, not just the ADU. The downside of disclosure is a higher premium. The downside of silence is a contested claim at the worst moment of a family's year. The agent's role is to put the ADU on the policy as what it is, which may mean a two-family rating, an occupancy endorsement, or a different form entirely.

Who lives there decides the form

• A parent or adult child who is a member of your household. Relatives who are residents of the insured's household are generally insureds under the policy for both property and liability. Whether a parent living in a detached unit with a separate kitchen is a "resident of your household" is exactly the kind of question the policy language does not answer cleanly. Ask, and get the answer in writing.
• A relative who is not a member of your household, paying rent or not. The occupant is a tenant for insurance purposes whether or not money changes hands. The carrier may require a rental dwelling endorsement, a landlord form, or a separate dwelling policy for the unit.
• An unrelated tenant. The unit is rental property. Homeowners policies exclude or limit business pursuits and many limit rental to others. A landlord policy, often called a dwelling fire or DP-3 form, or a rental endorsement on the homeowners policy, is the usual answer, with loss-of-rents coverage worth a conversation.
• Short-term guests. Most homeowners and landlord policies exclude or sharply limit short-term rental activity. Where a town allows it and a family chooses it, the agent needs to know before the first booking.

During Construction, Nobody Is Covered Unless Someone Bought It

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The second point where the agent belongs is before the construction contract is signed. Three separate exposures open on the day the first delivery lands in the driveway.

The building that is not a building yet

Lumber on the ground, a framed shell, cabinets in the garage waiting to go in: the homeowners policy may cover some of this under its dwelling or other structures provisions and may not, and theft of building materials is a common loss that many forms limit. Builder's risk, sometimes written as a course of construction endorsement on the homeowners policy and sometimes as a separate policy, covers the structure and materials during the build. Who buys it, the homeowner or the contractor, is a contract term. The agent and the attorney should agree on it, and the construction contract should say it.

The people doing the work

A contractor's general liability policy covers damage the contractor causes. A contractor's workers' compensation policy covers injuries to the contractor's employees. When either is missing, an injured worker or a damaged neighbor looks to the next available source of money, which is the homeowner. The ADU Exchange standard is simple: before any deposit, obtain certificates of insurance for general liability and workers' compensation, request them from the contractor's insurance agent rather than from the contractor's own files so the dates and limits are current, confirm the general contractor's subcontractors are covered too, and ask your own agent to review the certificates. In Massachusetts, confirm the contractor's Home Improvement Contractor registration on the state's public registry at the same time; the registration is what gives the homeowner access to the state guaranty fund if the project fails. For the reasons this matters, read what California's ADU fraud wave should teach New England.

The house while the family is elsewhere

Interior conversions sometimes send the family to a relative's house for a few months. Most homeowners policies restrict or suspend certain coverages when a dwelling is vacant beyond a stated period, often thirty or sixty days. If the project will empty the house, the agent needs to know the dates.

Mom's Things Are Not on Your Policy

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The occupant of a family ADU usually arrives with a lifetime of belongings and no insurance of their own, because the house they sold took the policy with it. If the occupant is not a resident of the insured's household in the policy's sense, their furniture, their jewelry, and their liability if someone is hurt in the unit are not covered by the homeowner's policy at all. The answer is a renters policy, the HO-4 form, in the occupant's own name. It is inexpensive, it covers contents and personal liability, and it includes loss-of-use coverage that pays for somewhere to live if the unit is damaged. It should be in force on move-in day.

Liability runs both ways. If the parent's guest trips on the cottage step, the claim may land on the homeowner's policy, the parent's policy, or both, and the carriers will argue about it. A personal umbrella policy over the homeowner's underlying coverage is a conversation worth having on any property with two households on it, and the agent should check that the umbrella's underlying requirements still match the new configuration.

Water Is the Claim You Will Actually Have

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Fire is the loss families imagine. Water is the loss they have. An ADU adds plumbing, adds fixtures, often adds a basement bathroom, and in the detached case adds buried utility lines across the yard. Four coverages deserve a specific question.

Sewer and septic backup

Standard homeowners policies exclude water that backs up through sewers or drains or overflows from a sump. Backup coverage is an endorsement, usually with its own limit, and the default limits are often small relative to a finished basement with a kitchen in it. On a septic lot, the ADU also raised the question of whether the system can handle the added bedroom at all; that is the subject of the Title 5 guide, and the agent should know the answer before writing the backup limit.

Service lines

A detached ADU means new water, sewer, electric, and sometimes gas lines running underground to the cottage. The homeowner owns them. Standard policies generally do not cover the cost to dig up and replace a failed underground line. Service line coverage is a modest endorsement that does. Ask for it.

Flood

Homeowners policies exclude flood. Flood coverage comes from the National Flood Insurance Program or a private flood carrier, and the NFIP's Standard Flood Insurance Policy has a rule that matters enormously for ADUs: it covers one building per policy. A detached garage can be covered as an extension of the main building's policy, up to ten percent of the building limit, but only if it is used for parking and storage. A detached building used as a dwelling needs its own flood policy, and a garage that is converted into an ADU loses the garage extension the day it becomes a residence. Basement and below-grade space carries its own flood coverage limits. If any part of the property is in or near a mapped flood zone, the detached ADU needs its own flood policy and the basement ADU needs a hard look at what the flood form will actually pay.

Ordinance or law

After a loss, the town will require the rebuild to meet current code, and current code may require more than the original structure had. Ordinance or law coverage pays the difference. Many policies include a small amount and allow it to be increased. For a property that now has a second dwelling unit built to the current energy, fire separation, and egress requirements, the increase is worth pricing.

The Policies Nobody Thinks Of

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Two more belong on the list. The owner's title insurance policy issued at purchase insures the state of title on the day of closing. It does not insure that the new cottage sits inside the lot lines or clear of a recorded easement. That protection comes from the survey, not from title insurance, which is why the survey comes before the floor plan. And where the family's plan includes a parent's long-term care, the long-term-care insurance conversation and the Medicaid planning conversation belong in the same month as the ADU decision, with the agent and the elder law attorney in the same loop. The companion article on why a family ADU needs an attorney before it needs a builder covers that side.

Seven Questions, Seven Written Answers

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This is the list to bring to the agent. The answers go in writing, on the declarations page or in an endorsement, not in a reassuring email.

When to Call

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1. Before the construction contract is signed. Builder's risk, contractor certificates, vacancy dates, and a preliminary replacement cost figure for the ADU so the premium is not a surprise.
2. When the permit is issued. Confirm the policy reflects construction in progress and that the carrier has been told what is being built.
3. At the certificate of occupancy. Raise Coverage A or B to the finished replacement cost, set the occupancy classification, add the water endorsements, bind any separate flood policy, and update the umbrella.
4. On move-in day. The occupant's renters policy is in force, and the agent has the occupant's name and relationship on file.
5. At every change in occupancy or use. A death, a move, a new tenant, a first short-term booking. Each one is a call, not a renewal.
6. Every year at renewal. Replacement costs in New England have moved sharply in recent years. Confirm the limits still match the buildings.

The Same Contract in All Six States

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Insurance is a contract, and the policy form governs more than the state line does. The HO-3 structure, the Coverage B default, the vacancy and occupancy conditions, and the NFIP's one-building rule are the same in Massachusetts, Rhode Island, Connecticut, New Hampshire, Vermont, and Maine. What differs is the regulator, the availability of coverage, and the consumer protections. Each state has an insurance department with a consumer division that publishes homeowners guidance and takes complaints: the Massachusetts Division of Insurance, the Rhode Island Department of Business Regulation, the Connecticut Insurance Department, the New Hampshire Insurance Department, the Vermont Department of Financial Regulation, and the Maine Bureau of Insurance. Coastal and wildfire-adjacent properties in several of these states increasingly find standard coverage harder to place, and a residual market such as the Massachusetts FAIR Plan writes different forms with different limits. Use an agent licensed in the state where the property sits, and ask specifically whether the ADU affects placement.

Why the Agent Is a Member of the Team

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Families treat insurance as a bill rather than a decision because, most years, nothing happens. An ADU is the year something changes. The building is new, the occupant is new, the plumbing is new, the use may change, and the policy that worked for the old house is now a document describing a property that no longer exists. The agent is the one professional whose entire job is to make the contract match the property, and the cost of bringing them in early is a few phone calls and a premium that reflects reality. The cost of leaving them out is a check for ten percent of the house.

The ADU Exchange connects New England families with insurance professionals through the Court House department. Call before the contractor, not after the fire.