The question: What are the best ways to water proof the house especially against major damage from water heater, fridge, dish washer, washing machine, plumbing leaks?

The only way I see you being denied is if the property does not pass the physical inspection, which simply requires a clean home with no safety or health risks.

1) It is not yet clear but it seems that you will be grandfathered in at the time when the changes occur in regards to occupancy changes.2) Per AB-68:"(A) One accessory dwelling unit and one junior accessory dwelling unit per lot with a proposed or existing single-family dwelling if all of the following apply:(i) The accessory dwelling unit or junior accessory dwelling unit is within the proposed space of a single-family dwelling or existing space of a single-family dwelling or accessory structure and may include an expansion of not more than 150 square feet beyond the same physical dimensions as the existing accessory structure.

The insurance I am talking about is insurance to protect your property such as from fire, damage, etc. 

We found the PM has been burning through our money (almost $2,000 for 2019 plumbing bills, due to hiring people on weekends for simple things), not calling us in a timely manner when we had an unrelated issue cause water damage!

I've not had a late payment or any damages (knock on wood).

Most general rehabbers stayed away from this home because the foundation was so badly damaged.

Would it be worth taking on additional risk, like a renter who caused trouble or damaged clubhouse property?

What if he left the property damaged? 

The document transfers the liability for damage to them.I rent W/D to my tenants.