Renting Out an ADU or Basement Apartment in Rockville? Your Home Policy May Not Cover It

Over the past few years, more and more Montgomery County homeowners have turned unused space into rental space. A basement with a separate entrance becomes a one-bedroom apartment. A detached garage behind a Rockville colonial becomes a studio. A bonus room over the garage in North Potomac becomes a suite for an aging parent — and then, eventually, for a paying tenant.

The county's accessory dwelling unit (ADU) rules have made this far more feasible than it used to be, and the economics are compelling in a market where rents in Rockville, Bethesda, and Silver Spring routinely run four figures. What almost nobody thinks about until it's too late is the insurance side: the moment you accept rent from a tenant, your homeowners policy may stop protecting a meaningful part of your property.

We see this at our Rockville office more often than you'd expect — usually after a claim has already been denied.

Why Your Homeowners Policy Balks at a Tenant

A standard homeowners policy is written on a simple assumption: this is your home, you live in it, and the people inside it are your household. Introduce a paying tenant and you've introduced a business use of the property. Most carriers respond to that in one of three ways:

• They exclude the rental portion. Damage to the unit itself, and liability arising from it, falls outside the policy.
• They non-renew. Some carriers simply won't insure an owner-occupied home with a separate rental unit under a standard form.
• They cover it — if you tell them. Many carriers will endorse the policy to permit a single rental unit, sometimes for a modest premium. But you have to disclose it.

The failure mode is almost always the same: the homeowner doesn't call. They assume the house is the house and insurance is insurance. Then a tenant's space heater causes a fire, or a tenant's guest slips on the basement stairs, and the adjuster asks a question the homeowner didn't expect — who was living down there?

Four Coverage Gaps Specific to Rockville ADUs

1. Liability for a tenant and their guests

This is the big one. Your homeowners liability section covers you, your family, and your guests. A tenant is neither. If someone is injured in the unit — a fall on exterior basement steps after an ice storm, a burn from faulty wiring in a garage conversion — you can be sued as a landlord, and a policy without rental coverage may decline to defend you. Defense costs alone can run into six figures long before any judgment.

2. Loss of rental income

If a covered event makes the unit uninhabitable, your homeowners policy will pay your additional living expenses. It will not replace the $1,800 a month you were collecting. Rental income (sometimes called “fair rental value”) coverage is a separate item, and for a Montgomery County ADU it's usually worth adding — a six-month restoration after a kitchen fire is a five-figure hit.

3. Tenant belongings — and the conversation you should have

Your policy does not cover your tenant's furniture, electronics, or clothing. Theirs doesn't either, unless they buy renters insurance. The cheapest risk-management tool available to an ADU landlord is a lease clause requiring the tenant to carry renters insurance with the owner named as an additional interest. It costs the tenant a few dollars a month, it gives them their own liability coverage, and it keeps small disputes from landing on your policy. Assurant, one of the carriers we work with, is a renters specialist and can typically quote a tenant quickly.

4. The permitted-versus-actual gap

Montgomery County's Department of Permitting Services has specific requirements for accessory dwelling units — egress windows, ceiling height, separate utilities in some cases, parking, licensing. Some of these are safety requirements a carrier cares about directly. An unpermitted basement apartment with no code-compliant egress isn't just a county problem; it's a coverage problem and a liability problem. Verify your project with DPS before you list the unit, and keep the paperwork.

What Coverage Usually Looks Like Instead

There isn't one right answer — it depends on whether the unit is attached, whether you live on the property, and how many tenants you have. The three common paths:

1. Homeowners policy with a rental endorsement. Best fit for an owner-occupied Rockville home with one attached ADU or basement apartment. Keeps everything on one policy. Erie, for example, is a carrier we place a lot of owner-occupied Maryland business with, and disclosing the unit up front is what makes this route work.
2. Landlord (dwelling fire) policy on the rental portion. More often used when the unit is detached or the arrangement looks more like a true rental operation. Steadily, one of our appointed carriers, writes landlord coverage and is built specifically for this.
3. A high-value homeowners form with the exposure built in. For larger properties in Potomac, Bethesda, or Chevy Chase where the home itself needs a high-net-worth form, Chubb-style policies can often accommodate a guest house or in-law suite within the main policy structure.

Which one is right — and what it costs — is exactly the sort of question an independent agent exists to answer. A captive agent at State Farm or Allstate can only offer you what their one company allows. We can compare across our appointed carriers and tell you where an ADU is welcome and where it isn't.

Short-Term Rentals Are a Different Animal

If you're thinking Airbnb rather than a 12-month lease, understand that most carriers treat short-term rental as a distinctly higher exposure — higher turnover, more strangers, more claims. Montgomery County licenses short-term residential rentals and imposes its own limits. Some carriers will endorse for occasional short-term rental, some will decline outright, and some home-sharing platforms provide limited host protection that is not a substitute for a real policy. If short-term rental is the plan, say so explicitly when you call. This is the fastest way to end up with an uncovered claim if you guess.

A Practical Checklist Before Your First Tenant

1. Permit it. Confirm the unit complies with Montgomery County DPS requirements and get the licensing right.
2. Call your agent before the listing goes up — not after the tenant moves in, and definitely not after a claim.
3. Add rental income coverage sized to your actual monthly rent.
4. Require renters insurance in the lease, with proof before move-in and the owner as additional interest.
5. Consider an umbrella. Becoming a landlord — even a small one — adds a liability exposure that a $1–2 million umbrella policy covers cheaply. Maryland's pure contributory negligence rule cuts both ways: it can help a defendant, but it does nothing to cap what a jury awards if you're found at fault.
6. Re-check your dwelling limit. A finished ADU raises the cost to rebuild your home. If you finished 800 square feet and never told anyone, you may now be underinsured on the main structure too.

The Bottom Line for Montgomery County Homeowners

An ADU is one of the better financial moves available to a homeowner in this county — steady income, more housing supply, a place for family. But it converts your home into a small business, and insurance is one of the few parts of that conversion that costs almost nothing to get right and a great deal to get wrong.

The whole fix is usually one phone call and a modest endorsement. The alternative is finding out, at the worst possible moment, that the most valuable thing you built isn't covered.

If you're planning an ADU or already renting one out in Rockville, Bethesda, Silver Spring, Gaithersburg, or anywhere in Montgomery County, we're happy to review your current home insurance and tell you plainly whether it holds up. If it doesn't, we'll show you what does — including landlord coverage if that's the better structure.