I have renters insurance on my property which consists of the main home, a one bedroom apartment and an illegal studio/workshop conversion.
3 weeks ago there was a small fire in the garage attached to my illegal studio, will my insurance cover this? And can I hold my tenant liable since it occured during there tenancy?
Try it and find out. If they know it is an illegal unit, they probably won't cover it.
You should do the right thing and shut down the illegal unit. Attempting to gain wealth through illegal means is never wise.