Need advice on homeowner's insurance and renter

I am closing on a house with a mother in law suite above the garage. The suite is built to code for an accessory dwelling unit. I do not know whether it has been registered with the city as being a legal rental unit. Thing is, there is a lady who has been living there for the last 3 or 4 years. She has bee paying rent to the current owner, but there is no formal lease agreement. Now that I am purchasing the house, it is up to me whether I want to keep her or not. Pros of letting her stay would be rent money to help toward my mortgage. Though honestly I am not stretching myself by any means and would be fine without the extra money. Cons are several. First I am a first time home buyer and not expedienced at renting property. Second I am worried if it is not legally registered with the city as a rental if I face possible fines for renting. Or if something adverse should occur and the renter sues me will be be at risk. Or if I need to file a homeowners insurance claim down the road, even though I am letting the insurance company know there is a accessory unit I am renting, will they have grounds to reject the claim if all the proper paperwork with the city is not in order. Then there is the issue of more complicated taxes. I know many people probably rent out units in their homes without everything being legit, but I am always worried about the what-ifs. The renter is a lady in her 40s who seems solid. I hate to ask her to move on short notice. Does anyone who has experienced in matters of insurance and renting have advice? Am I setting myself up for disaster?

Thanks for your help!