If you own a rental property or a home that is not your primary residence, you'll need a specialized type of insurance policy known as a dwelling fire policy. There are three main forms of dwelling fire policies - DP1, DP2, and DP3. The DP1 and DP3 represent the two ends of the coverage spectrum, with the DP1 being the most basic and limited policy, while the DP3 offers the highest level of comprehensive protection.
What is a DP1 Policy?
A DP1 policy, also called a Dwelling Fire Form 1, is a named peril policy that provides coverage only for the specific risks or "perils" listed in the policy documents. It is designed to provide bare-bones coverage for rental properties or vacant homes at the lowest possible cost.
With a DP1 policy, your rental property is typically covered for these nine named perils:
- Fire and lightning
- Windstorms and hail
- Explosions (internal and external)
- Riots and civil commotion
- Aircraft and vehicles
- Smoke
- Vandalism
- Volcanic eruptions
If the damage to your property is caused by any peril not listed above, such as water damage from burst pipes or falling objects, the DP1 policy will not provide coverage. This limited range of coverage is a major drawback of the DP1.
Additionally, DP1 policies only pay out claims based on the actual cash value (ACV) of the damaged property, not the full replacement cost. The ACV factors in depreciation, so you'll receive a payout amount equal to the current market value of the damaged components, not the cost to fully repair or replace them with new materials.
What's Covered in DP1 Policy?
- Dwelling structure (limited to the 9 named perils)
- Other detached structures like garages, sheds, fences
- Fair rental value/loss of rental income (sometimes included)
- Personal liability (sometimes included as optional coverage)
What's NOT Covered in DP1 Policy?
Common DP1 Exclusions
- Water damage from plumbing, appliances, or exterior sources
- Theft, vandalism, and malicious mischief
- Weight of ice, snow, or sleet
- Falling objects like trees
- Freezing of pipes
- Power surge damage
What is a DP3 Policy?
On the other end of the spectrum is the DP3 policy, also known as a Special Form policy or Dwelling Fire Form 3. The DP3 is considered the most comprehensive landlord insurance option as it provides open peril coverage.
Unlike the named peril DP1 which only covers listed events, a DP3 policy covers all risks except those specifically excluded in the policy documents. This open peril approach means your rental property is protected against a wide range of perils like water damage, theft, falling objects, ice and snow, and more.
The typical exclusions on a DP3 policy are:
- Floods and water damage from exterior sources
- Earth movement like earthquakes and sinkholes
- Power failure or utility service interruption
- Neglect, improper maintenance, or wear and tear
- Intentional damage or losses caused by the policyholder
- Damage from war, nuclear hazards, or government actions
- Mold, fungus, wet or dry rot
Another key advantage of the DP3 policy is that it pays out claims at full replacement cost value (RCV), not just depreciated ACV. This means if your roof needs to be replaced due to a covered peril, you'll receive enough to install a new roof using current material and labor costs, without any depreciation deducted.
Many DP3 policies also include loss of rental income coverage, which reimburses you for the rent payments you miss out on if your tenants have to temporarily vacate the premises due to a covered loss making the property uninhabitable.
What's Covered in DP3 Policy?
- Dwelling structure (open peril coverage except exclusions)
- Other detached structures
- Fair rental value/loss of rental income (usually included)
- Personal liability (usually included, can increase limits)
- Personal property like appliances (sometimes included, can add coverage)
What's NOT Covered in DP3 Policy?
Common DP3 Exclusions
- Flood
- Earth movement/earthquake
- Power failure
- Neglect, wear and tear
- Intentional losses
- War and nuclear hazards
- Mold, fungus, wet/dry rot
- Government/civil authority actions
What Are The Similarities Between DP1 and DP3?
While DP1 and DP3 policies differ significantly in their coverage scope, they do share some core similarities:
- Both are designed for rental properties or homes that are not the policyholder's primary residence
- Both provide coverage for the dwelling structure itself as well as detached structures like garages or sheds
- Neither policy automatically includes coverage for your personal belongings inside the home, though personal property coverage can often be added for an additional premium
- Liability coverage for injuries on the property is usually an optional add-on for both policy types
What Are The Differences Between DP1 and DP3?
The main distinctions between DP1 and DP3 landlord insurance policies lie in their coverage scope, claim payouts, and premium costs:
Coverage Scope
- DP1 is a named peril policy covering only the specific events listed
- DP3 is an open peril or "all-risk" policy covering all perils except those explicitly excluded
Claim Payouts
- DP1 pays claims at actual cash value (ACV), factoring in depreciation
- DP3 pays claims at full replacement cost value (RCV) for repairs/rebuilding
Premium Costs
- DP1 premiums are lower due to the limited named peril coverage
- DP3 premiums are higher to account for the open peril comprehensive coverage
Additional Coverages
- DP3 often includes loss of rental income coverage if the property is uninhabitable
- DP3 sometimes includes personal property coverage for the owner's belongings
- Liability coverage is usually an optional add-on for both DP1 and DP3
What’s The Average Cost Difference Between DP1 and DP3?
The premium difference between a DP1 and DP3 policy can vary significantly based on the insured property's value, location, age, and other risk factors. However, you can generally expect to pay 30-50% more for a DP3 policy compared to a basic DP1 policy.
According to rental property insurance quotes gathered across multiple states, the average annual premium for:
- A DP1 policy is around $700-$900
- A DP3 policy is around $1100-$1300
So for the same rental home, you could pay $400-$600 more per year to upgrade from a DP1 to a DP3 policy and gain that extra comprehensive coverage.
Conclusion
In summary, the DP3 policy provides significantly more comprehensive coverage for rental properties compared to the bare-bones DP1 policy. However, this increased protection comes at a higher premium cost. Landlords need to carefully evaluate their specific rental situation, weigh the risks, and determine if paying more for a DP3 policy makes financial sense to properly protect their investment property.
Sources:
- https://floridalandlordinsurance.com/dp-3-dp-1-insurance-policies/
- https://www.steadily.com/glossary/dp-1
- https://tgsinsurance.com/texas-landlord-insurance/dp1-policy/
- https://www.steadily.com/glossary/dp-3
- https://jimwelchinsurance.com/lubbock-insurance/need-to-know-the-difference-between-a-dp1-and-dp3-home-insurance-policy/
- https://www.aisagency.com/dp1-vs-dp3.html
- https://www.checkupfinancial.com/forms/DP_policies.pdf
- https://assurance.com/home-insurance/difference-between-dp1-dp2-dp3/
- https://www.floridapeninsula.com/blog/what-insurance-coverage-is-best-for-investment-or-rental-property
- https://www.insurance-education-group.com/dp3-rental-home-insurance-policy/
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