DP-3 is the most comprehensive of the landlord or rental insurance policies. In a lot of ways, it is comparable to an HO-3 policy. It covers everything that DP-1 and DP-2 policies cover and more. It is a customizable policy that gives a landlord a lot of ability to fit the policy to their specific needs. It is considered the best coverage a landlord can get on the market.
- DP-3 home insurance is the most comprehensive coverage of dwelling property policies and includes customization capabilities.
- DP-3 policies provide open-peril, replacement cost value coverage to landlords.
- A DP-3 policy is great for vacation homes, investment/rental properties, and homes with older roofs.
What is DP-3 dwelling property insurance?
DP-3 home insurance policies are comprehensive home insurance policies that are designed to protect landlords of rental properties or homeowners who have a vacation home or something to that effect. It is a policy that typically offers a lot of options for customizations to fit the landlord’s exact needs. Coverage D (loss of use coverage) in DP-3 policies includes fair rental value protection which is a very important coverage for landlords.
DP-3 policies may also be a good fit for a home with an older roof. The reason for this is due to the DP-3 policy having what’s called the roof surfacing payment schedule endorsement that can be added to it. This provides the homeowner with discounted protection to cover a roof for only wind and hail damage and to be reimbursed on an actual cash value basis for that damage.
DP-3 home insurance policies are the most popular and most utilized form of dwelling property insurance thanks to having the encompassing coverage of the three available forms.
Some insurance companies allow you to exclude personal property coverage from DP-3 which can help the landlord get the exact coverage they need and not pay for unwanted or unnecessary coverage.
What is covered by a DP-3 insurance policy?
Just like DP-1 and DP-2, DP-3 covers the dwelling and any attached structures as well as other structures on the property. DP-3 also can cover personal property. Coverages such as personal liability and medical payments to others can be added to DP-3 policies as well, through riders or endorsements. These are two coverages that would come standard with a standard home insurance policy such as HO-3 or HO-5.
DP-3 is far more encompassing in what is covered by it compared to the other policy forms due to it providing coverage on an open perils basis versus a named perils basis. Named perils policies provide coverage for perils that are specifically listed in the policy and all other perils are excluded. Open peril policies provide coverage for all perils that are not explicitly excluded in the policy.
There are other additional coverages that can be added to a DP-3 policy such as:
- Limited burglary coverage provides protection for visible damages that were due to a burglary
- Premises liability coverage provides protection for someone being injured on the property who isn’t the landlord or tenant.
There may be even more coverages that can be added on or taken off to customize your specific policy to your specific needs. It is worth a conversation with your insurance agent to discuss what coverages are available and right for you.
Fair rental value coverage
This coverage may or may not already be included in your DP-3 policy depending on your insurance provider and location. If it is not already included, it would most likely be something to consider including through an add-on.
Fair rental value coverage is an essential coverage for landlords as it reimburses the landlord for lost rental income that the homeowner would have received had no damage occurred to the rental property and a tenant would have been able to rent it. Damage to a rental property may stop a landlord from receiving a significant income stream. If this is a concern for you, read through your policy and check with your insurance provider to see if this is something you are covered for and if not, what options are available.
What is not covered under a DP-3 insurance policy?
Even though DP-3 is the most comprehensive of the three DP policies, it still has some standard exclusions like every other home insurance policy. The exclusions include but are not limited to perils such as:
- Intentional damage
- Earthquakes and other ground movement
- Flooding
- Gradual water damage
- Mold
- War
- Nuclear hazard
- Power damage
- Wear and tear
- Neglect
Some of these perils such as flooding or earthquakes can become covered by the homeowner purchasing separate policies for those specific perils. Make sure to read through your policy to understand what exactly is covered and excluded in your policy and check with your insurance agent to see what options are available to you.
DP-3 insurance reimbursement limits
There are two forms of coverage limits that insurance companies use to determine the maximum amount that they will reimburse a homeowner for in the event of a covered claim: actual cash value and replacement cost value.
DP-3 policies provide coverage on a replacement cost value basis. This is one of the reasons why they are the most popular form of DP insurance.
Actual cash value reimbursement is less encompassing than replacement cost value reimbursement because actual cash value takes into account depreciation in the value of the dwelling or whatever the item is, over time. This means as the dwelling or other piece of property ages, the maximum amount that will be reimbursed to the homeowner for covered damage will decrease. Depreciation is the decrease in the value of an item as its useful life wanes. The IRS has depreciation tables for various categories of items including dwellings. The table states the number of years that are considered the useful life of that object. This is the number that is used in the calculations to determine the value of the object in any given year of its existence.
For example, let’s say the homeowner has an actual cash value policy that initially provides a coverage limit of $250,000 to replace the dwelling. Ten years later a fire occurs, and the home is destroyed. Let’s say that in this example, the value of the home depreciates by $10,000 per year. It is determined that it will take the homeowner $300,000 to rebuild the home to the same standard that it was originally. In this case, the insurance company would reimburse the homeowner for $150,000 to rebuild the home leaving the homeowner to foot the bill for the additional $150,000. The ten years of depreciation decreased the maximum amount that would be reimbursed to the homeowner by $100,000 (10 x $10,000). This is especially troublesome for owners of older homes as coverage can become essentially non-existent as time goes on.
On the other hand, replacement cost value reimbursement provides the homeowner with the same protection as actual cash value reimbursement but does not factor in depreciation. This provides better coverage to the homeowner over the long term and is a better option for owners of older homes.
Looking at the same example above, now the homeowner would be reimbursed $250,000 for the damage that occurred in year 10 of the policy. This leaves the homeowner with only $50,000 that they would have to pay out of pocket to rebuild the home. A significant difference compared to the actual cash value.
Cost of DP-3 home insurance
One of the major drawbacks to DP-3 home insurance policies is their cost. Since these policies provide the most comprehensive coverage of dwelling property policies, they also have the highest premium cost. Depending on how much coverage is added to the policy by the landlord, the cost could be significantly higher than a DP-2 or DP-1 policy. On top of that, rental property and vacation home insurance policies like DP-3 typically have higher premiums than standard home insurance policies because having tenants or homes that are unoccupied for longer periods of time, significantly increases the exposure of the property to perils that an insurance company may be on the hook for.
Location can be a factor in the price of the policy as well. Some areas of the country are more prone to adverse conditions than others, leading to higher rates. According to insurance.com, the average cost of a homeowners policy is somewhere around $2,300 per year. If purchasing a DP-3 policy, expect the cost of the policy to be quite a bit higher than that, possibly in the $2,800 to $3,000 range on average.
Other factors that can increase or decrease the cost of a DP-3 policy are:
- Number of rental units
- Age of the dwelling
- Size of the dwelling
- Long-term or short-term renters
There are a number of nuances that factor into the rate that any landlord can expect to pay in their specific policy and their specific circumstances.
Talk with an insurance agent to gain a full understanding of what your policy will do for you if disaster strikes and see what options are available to you at a rate that makes sense for you.
