A Corrimal owner rang us a few weeks after their granny flat was handed over. A tenant was moving in on Saturday, and they had just realised they had no idea whether their home policy covered the new building, the tenant, or neither. It is a very common call. Granny flat insurance is one of those things nobody thinks about until the keys change hands, and by then the gaps are already there.
The short version is that the cover you need changes at three points: while the flat is being built, once it is finished, and again depending on who lives in it. Get each one right and you are covered. Miss one and a claim can fall over.
During the build, the builder carries most of the risk
While the flat is under construction, the site is the builder’s responsibility. A properly set up builder holds contract works insurance, which covers the structure and materials against things like fire, storm and theft until handover. They should also hold public liability cover in case someone is hurt on site.
In NSW there is a third layer that matters more than people realise. For residential work above a set contract value, a licensed builder has to take out cover under the Home Building Compensation Fund before asking you for a deposit. This protects you, not the builder. If the builder dies, disappears or goes broke and can’t finish the job or fix defects, this is what you claim on.
Ask for the certificate before you pay anything. A builder who hesitates to show it is telling you something. If you are still comparing builders, it belongs on the same list as licence checks and fixed pricing. Our granny flat construction process runs through Jaya Builds, an established local Illawarra builder, so the insurances sit with a builder that already delivers residential projects across the region.
One thing your own home policy may need during the build: a quick call to tell your insurer that construction is happening on the property. Some policies limit cover while major work is underway. It takes five minutes and avoids an argument later.
After handover, the flat becomes part of your home policy
Once the builder hands over, the contract works cover ends. The granny flat is now a permanent structure on your title, and most building insurance policies treat it like the house, the garage and the fences: part of the insured buildings at that address.
The catch is the sum insured. Your policy was set for the house you had before. Add a new dwelling and that figure is almost certainly too low. If the worst happens and both buildings are damaged, an underinsured policy pays out against the old number, and you cover the shortfall yourself.
So the first job after handover is to ring your insurer, tell them a self-contained second dwelling has been added, and raise the sum insured to reflect the rebuild cost of both buildings. Your final contract price is a sensible starting point for the flat’s share. The insurer will also ask whether it has its own kitchen and bathroom, and whether anyone will live in it. Answer honestly. Those answers decide which policy you actually need.
Who lives in the flat changes everything
This is where most of the confusion sits. The same building can need quite different cover depending on whether it is empty, housing family, or rented to a stranger.
Family living there, no formal rent
If Mum or an adult child moves in, many insurers are comfortable leaving the flat under your normal home and contents policy, provided they know about it. Their belongings are a separate question. Your contents cover usually only protects your things, so the person living in the flat may need their own contents policy. If money is changing hands, even informally, tell the insurer, because some will treat that as a rental. Families setting this up properly often pair it with a written arrangement, which we cover in our post on granny flat agreements and Centrelink.
Rented to a tenant
Once there is a lease, you are a landlord, and a standard owner occupier policy may not cover the rented part of the property. Landlord insurance covers things a home policy usually won’t: malicious or accidental damage by the tenant, lost rent if the flat becomes unlivable after an insured event, and sometimes rent default.
The tricky part is the mix. You live in the main house, a tenant lives out the back, and it’s all on one title. Some insurers will write both under one combined policy. Others won’t touch it, and owners in online forums report being knocked back because the flat had a separate electricity meter. Expect to make a few calls, or use a broker who handles these setups regularly.
Holiday letting
Plenty of Illawarra owners near the beach think about listing the flat on Airbnb. Most home and landlord policies exclude holiday letting, or only cover it with a specific add-on. If you plan to host guests, get that in writing before your first booking.
Unapproved flats are the hardest to insure
We see this most often with older backyard conversions and flats that came with a house purchase. If a building was never approved, an insurer may refuse a claim on it, or on the whole policy if they decide you didn’t disclose it. The risk is real enough that some lenders and buyers walk away from these properties.
A flat built under a proper CDC or council approval, with an occupation certificate at the end, comes with the paperwork an insurer wants to see. Every flat we build goes through approval first. If you are not sure whether an existing flat on your block was approved, our guide to Illawarra granny flat approvals explains how to check.
Check your policy for flood and bushfire
The Illawarra has both. Blocks along the escarpment are often mapped as bushfire prone, and low lying pockets around Lake Illawarra and the creeks can be flood affected. Your approval will already have dealt with the building side of this, but your insurance is a separate question.
Read the product disclosure statement for how it handles flood. Some policies include it automatically, some let you remove it, and some exclude it. If your block carries a bushfire rating, check that the flat is listed at the right construction standard, since a policy priced for the house alone may not reflect it.
A checklist before your first tenant moves in
Most owners can sort all of this in an afternoon. The order we suggest:
- Builder’s Home Building Compensation Fund certificate, filed with your contract
- Occupation certificate and approval documents kept together
- Home insurer told about the new dwelling, with the sum insured raised
- Decision made on who will live there, and the matching policy in place
- Flood and bushfire cover confirmed in the product disclosure statement
- Contents cover sorted for whoever lives in the flat
None of this is legal or financial advice, and every policy reads differently. Your insurer or a broker has the final word on your situation. What we can do is make sure the building side is right from day one, with approval, certification and builder’s cover in place before the first slab is poured.
If you are planning a flat and want those foundations sorted properly, have a look at how we handle granny flat builds across the Illawarra and Southern Highlands, or book a free site inspection and we will walk your block with you.
Granny flat insurance questions we get asked
What insurance do I need for my granny flat?
At minimum, building insurance that includes the flat at its full rebuild cost. If you rent it out, you will usually need landlord insurance as well, and whoever lives there should think about their own contents cover. During construction, your builder should hold contract works cover and Home Building Compensation Fund cover.
Does building insurance cover a granny flat?
Usually yes, because a granny flat is a permanent structure on your title, much like a garage. The common problem is the sum insured. If you don’t increase it after the flat is built, the policy may not pay enough to rebuild both buildings.
How much does it cost to insure a granny flat?
It depends on the rebuild value, your location, flood and bushfire risk, and whether the flat is rented. The only reliable way to know is to get quotes for both setups: one combined policy, and separate home and landlord policies. Prices vary a lot between insurers for the same property.
How much more expensive is landlord insurance?
Landlord policies generally cost more than a standard home policy because they cover tenant damage and lost rent. For a granny flat, the bigger question is whether your insurer will cover a rented flat and an owner occupied house together. Compare the total cost of the combined option against two separate policies.
Can I insure a granny flat that isn’t council approved?
Some insurers will refuse, and others may decline a claim later if the flat turns out to be unapproved. You must disclose it either way. Getting the flat certified, or replacing it with an approved build, is the only way to remove that risk properly.
What damage does home insurance commonly not cover?
Gradual damage is the big one: slow leaks, rot, wear and tear, and problems caused by poor maintenance. Flood is also excluded or optional on some policies. Read the exclusions section of your product disclosure statement, not just the summary page.
