NYC ADU Insurance: What Coverage Do You Need?

You are about to build a second dwelling unit on your property — or you already have. Your current homeowner's insurance policy was written to cover a single-family home. It almost certainly does not cover your ADU, and if something goes wrong, you could be looking at an uninsured loss of $100,000 or more.

Insurance is one of the least exciting parts of building an ADU, but it is one of the most consequential. This guide explains exactly what coverage NYC homeowners need for each type of ADU, what it costs, how to avoid common gaps, and what happens if you skip it.

Why Your Current Homeowner's Policy Is Not Enough

Standard homeowner's insurance policies (HO-3 in industry terms) are designed to cover your primary dwelling and structures "appurtenant" to it — meaning attached or closely related, like a garage or a shed. Here is where ADUs create problems:

• Detached ADUs are classified as "other structures" and are typically covered at only 10% of your dwelling coverage limit. If your home is insured for $500,000, your detached ADU would have a maximum of $50,000 in coverage — far less than its construction cost of $200,000 to $400,000.
• Basement ADUs may fall under your dwelling coverage for structural damage, but tenant belongings, tenant injuries, and rental income loss are not covered by a standard homeowner's policy.
• Rental use changes the risk profile entirely. The moment you accept rent from a tenant in your ADU, your homeowner's policy may exclude coverage for that portion of the property. Some insurers will void your entire policy if they discover unreported rental activity.

The bottom line: building and renting an ADU without updating your insurance is one of the most expensive mistakes a homeowner can make. It does not cost much to fix — typically $500 to $2,000 per year in additional premiums — but the consequences of not fixing it can be catastrophic.

Detached ADU Coverage: Separate Structure Rider vs. Standalone Policy

If you are building a detached backyard cottage, above-garage apartment, or other standalone ADU, you have two main insurance options:

Option 1: Increase Your "Other Structures" Coverage

Your existing homeowner's policy has an "Other Structures" coverage section (Coverage B). By default, this is set at 10% of your dwelling coverage. You can request an increase — often called a separate structure rider or endorsement — that raises this limit to match the actual replacement cost of your ADU.

Pros:

• Simple — one policy, one premium, one insurer
• Lower cost than a standalone policy (typically $300-$800/year additional)
• Covers the physical structure against fire, wind, theft, vandalism, and other named perils

Cons:

• Does not automatically include liability coverage for tenants
• Does not cover loss of rental income if the ADU is damaged and uninhabitable
• Your insurer may not offer sufficient limits for high-value ADU construction
• A claim on the ADU affects your primary home policy's claims history

Option 2: Standalone Dwelling Fire Policy (DP-3)

A DP-3 policy is a standalone insurance policy specifically designed for rental properties. It covers the ADU as its own insured structure, separate from your homeowner's policy.

Pros:

• Complete coverage for the structure, liability, and loss of rental income
• Claims on the ADU do not affect your primary homeowner's policy
• Designed for rental properties — no gaps in coverage for tenant-occupied units
• Can include higher liability limits

Cons:

• Higher cost than a rider ($800-$2,000/year depending on coverage limits)
• Separate policy to manage, separate renewal dates
• May require a separate insurer if your current company does not offer DP-3 policies

Recommendation: If you are renting the ADU, a standalone DP-3 policy is almost always the better choice. The cost difference is modest, and the coverage is comprehensive. If the ADU is for family use only (no rental income), a separate structure rider on your existing policy is usually sufficient.

Basement ADU Coverage

Basement conversions are simpler from an insurance perspective because the ADU is part of your existing structure, not a separate building. However, you still need to make changes to your coverage:

What You Need to Update

• Dwelling coverage limit: Increase your Coverage A to reflect the value the basement conversion adds to your home. If you spent $120,000 on the conversion, your insured dwelling value should increase by at least that amount.
• Rental dwelling endorsement: If you are renting the basement unit, add a rental endorsement to your homeowner's policy. This tells your insurer that part of your home is occupied by a tenant and ensures that rental-related claims are covered.
• Water damage and sewer backup: Standard homeowner's policies often exclude or severely limit coverage for water damage caused by sewer backup, sump pump failure, or groundwater seepage — the three most common damage events for basement units. Add a sewer/water backup endorsement with a limit of at least $50,000. This costs $50 to $150 per year and is essential for any basement ADU.

Flood Insurance for Basement ADUs

If your property is in a FEMA-designated flood zone (AE, AO, VE, or X-shaded), basement ADU coverage becomes more complicated. Standard homeowner's policies and most endorsements explicitly exclude flood damage. You need a separate flood insurance policy.

Important nuances for NYC basement ADUs in flood zones:

• NFIP (National Flood Insurance Program) policies cover basement improvements at limited levels — typically only $10,000 for contents in a basement
• Structural improvements below the Base Flood Elevation (BFE) may not be covered at all under NFIP
• Private flood insurance providers (like Neptune, Palomar, or Hiscox) offer more flexible coverage that can include below-grade improvements
• NYC's ADU regulations already restrict basement conversions in certain flood zones — if your property passed the eligibility check, your flood zone risk is manageable, but insurance is still required

Expect to pay $500 to $3,000 per year for flood insurance on a property with a basement ADU, depending on your flood zone designation and elevation.

Landlord Insurance Requirements (If Renting Your ADU)

The moment you accept rent for your ADU, you become a landlord. This changes your insurance obligations in several important ways:

Landlord Liability Coverage

If a tenant or their guest is injured in the ADU, you are potentially liable. Standard homeowner's liability coverage (typically $100,000 to $300,000) may not extend to injuries in a rental unit. You need explicit landlord liability coverage with a recommended minimum of $500,000.

Common liability scenarios for ADU landlords:

• Tenant slips on ice outside the ADU entrance
• Electrical fire caused by wiring in the ADU
• Tenant's guest injured on the property
• Carbon monoxide leak from the ADU's heating system
• Structural failure (roof collapse, stair failure)

Loss of Rental Income Coverage

If your ADU is damaged and cannot be occupied, you lose rent for the duration of repairs. Loss of rental income (also called "fair rental value") coverage pays you the rent you would have collected while the unit is uninhabitable. This is standard on DP-3 policies and available as an endorsement on homeowner's policies. The cost is minimal — typically $50 to $100 per year — and it protects against months of lost income after a fire, storm, or other covered event.

Require Renters Insurance from Your Tenants

Your insurance does not cover your tenant's personal belongings. If the ADU floods and their electronics, furniture, and clothing are destroyed, that is their loss — unless they have renters insurance. Require renters insurance as a condition of the lease. It costs tenants $15 to $30 per month, and it prevents disputes and potential lawsuits when their property is damaged in a covered event.

Construction-Phase Insurance (Builder's Risk)

There is a coverage gap that many homeowners do not think about: the period between when construction starts and when the ADU is complete. During construction, your existing homeowner's policy provides limited or no coverage for the structure being built. And your contractor's insurance covers their liability, not your property.

What Is Builder's Risk Insurance?

A builder's risk policy covers the ADU structure during construction against fire, wind, theft of materials, vandalism, and certain weather events. It is a temporary policy that lasts for the duration of construction (typically 6 to 12 months) and converts to permanent coverage when the project is complete.

Who Carries It?

This depends on your contract with your general contractor:

• If you are the owner-builder (acting as your own general contractor), you must purchase builder's risk insurance yourself
• If you hired a general contractor, check their contract — some GCs include builder's risk in their scope, others expect the homeowner to carry it
• Regardless of who carries it, confirm that the policy names you (the property owner) as an additional insured

Cost

Builder's risk insurance for a $200,000 ADU construction project typically costs $1,500 to $3,000 for the full construction period. This is a one-time cost, not recurring. Given that an uninsured fire during construction could destroy $100,000+ in materials and labor, this is not optional.

Flood Insurance for ADUs in Flood Zones

NYC has extensive FEMA-mapped flood zones, particularly in southern Brooklyn, the Rockaways, southern Queens, coastal Staten Island, and parts of the Bronx waterfront. If your property is in or near a flood zone, ADU insurance requires special attention.

NFIP vs. Private Flood Insurance

The National Flood Insurance Program (NFIP) is the default option, available to any property in a participating community (all of NYC participates). However, NFIP has significant limitations for ADUs:

• Maximum building coverage of $250,000 for residential structures
• Contents coverage up to $100,000 (but limited to $10,000 for basement contents)
• Does not cover loss of rental income
• Below-grade improvements have coverage restrictions

Private flood insurance carriers (Neptune Flood, Palomar, Hiscox, and others) can offer:

• Higher coverage limits
• Broader coverage for below-grade spaces
• Loss of rental income coverage
• Sometimes lower premiums than NFIP, depending on your property's specific risk profile

If your ADU is a basement conversion in a flood zone, private flood insurance is strongly recommended over NFIP because of the below-grade coverage limitations.

Elevation Certificates

Flood insurance premiums are based heavily on your property's elevation relative to the Base Flood Elevation (BFE). An elevation certificate prepared by a licensed surveyor documents your property's exact elevation and can significantly reduce your flood insurance premium. Cost: $300 to $800 for the survey. If your property is even slightly above the BFE, the premium savings can be thousands of dollars per year.

Estimated Annual Insurance Costs for NYC ADUs

Here is a realistic cost breakdown for each ADU type, combining all necessary coverage:

Basement ADU (Rented)

• Homeowner's policy increase (higher dwelling value): $200-$400/year
• Rental endorsement: $150-$300/year
• Sewer/water backup endorsement: $50-$150/year
• Umbrella liability (recommended): $200-$400/year
• Total additional cost: $600-$1,250/year
• Add $500-$3,000/year if in a flood zone

Detached ADU (Rented) — Rider Approach

• Increased other structures coverage: $300-$600/year
• Rental endorsement: $150-$300/year
• Umbrella liability: $200-$400/year
• Total additional cost: $650-$1,300/year

Detached ADU (Rented) — Standalone DP-3 Policy

• DP-3 policy (structure, liability, loss of income): $800-$2,000/year
• Umbrella liability (recommended): $200-$400/year
• Total additional cost: $1,000-$2,400/year

ADU for Family Use Only (No Rental)

• Increased dwelling or other structures coverage: $200-$500/year
• No rental or landlord coverage needed
• Total additional cost: $200-$500/year

How to Shop for ADU Insurance

The ADU insurance market is still catching up to New York City's new ADU regulations. Not every insurer understands what an ADU is or how to cover one. Here is how to navigate the process:

Step 1: Talk to Your Current Insurer First

Contact your existing homeowner's insurance company and explain that you are building (or have built) an ADU. Ask specifically about:

• Increasing your other structures coverage (for detached ADUs)
• Adding a rental dwelling endorsement
• Sewer backup coverage (for basement ADUs)
• Whether your policy will be affected by rental activity

Some insurers will accommodate all of these within your existing policy. Others will decline rental endorsements or limit coverage in ways that do not work for ADU owners.

Step 2: Get Quotes from Landlord Insurance Specialists

If your current insurer cannot provide adequate coverage, get quotes from companies that specialize in landlord and rental property insurance:

• State Farm, Allstate, and Nationwide all offer DP-3 landlord policies in New York
• Foremost (a Farmers subsidiary) specializes in rental dwelling policies
• NYCM (New York Central Mutual) is a regional carrier with strong NYC knowledge
• Independent insurance brokers can shop multiple carriers for you — this is often the most efficient approach

Step 3: Review Coverage Annually

Construction costs and property values change. Review your ADU coverage limits annually to ensure they reflect current replacement costs. An ADU that cost $200,000 to build in 2026 may cost $230,000 to replace in 2028. If your coverage limit has not kept pace, you are underinsured.

What Happens If You Skip ADU Insurance

Homeowners who skip or inadequately insure their ADUs face several serious risks:

• Uninsured fire loss: A fire that destroys your ADU is a $150,000 to $400,000 loss that comes entirely out of your pocket
• Liability lawsuit: A tenant injury in an uninsured or underinsured ADU can result in a lawsuit with no insurance company to defend you or pay the judgment
• Policy cancellation: If your homeowner's insurer discovers unreported rental activity, they can cancel your entire homeowner's policy — leaving your primary home uninsured
• Mortgage violation: Most mortgages require adequate insurance. An ADU that creates a coverage gap may put you in violation of your mortgage terms
• Code enforcement: NYC may require proof of insurance as part of the Certificate of Occupancy process for your ADU

The cost of proper ADU insurance — $500 to $2,000 per year — is a fraction of a single month's rent. There is no rational financial argument for skipping it.

Next Steps

Insurance is one piece of the ADU planning puzzle. Before you talk to an insurer, make sure you know what you are building:

1. Check your property's eligibility — know your ADU type and construction scope before shopping for insurance
2. Read our ADU timeline guide — understand when you need builder's risk vs. permanent coverage
3. Review the rental income guide — factor insurance costs into your ROI calculations
4. Book a free consultation — our ADU specialists can connect you with insurance brokers who understand NYC ADU coverage

Get the coverage right from the start. It is the least glamorous part of building an ADU, and it is the part that protects everything else.