What Is a DP3 Policy?

A DP3 policy, short for a dwelling property policy, is one of the most comprehensive insurance policies protecting residential rental properties against loss and damage. This policy is the best for protecting seasonal properties, primary residences, vacation homes, and short-term rentals.
Learn more about the coverage a DP3 provides, who it’s good for, and how it’s different from other policies.

WHAT DOES A DP3 POLICY COVER?

DP3 policies insure and protect the residential rental property’s structure, and cover the landlord’s personal belongings.

In the event of loss or damage, a DP3 policy also covers the following:

• Garage
• Shed
• Fence
• Guesthouse
• Items within the structure furnished by the owner (such as appliances)
• Loss of rent (if added to the policy)
• Personal liability in case of injury (if added to the policy)

Although it’s often referred to as “dwelling fire,” a DP3 policy covers more than just fires. As an open peril policy, it also covers loss from lightning, windstorm, hail, vandalism, and other risks, unless your policy specifically excludes them from coverage. As a specialist in coastal markets, SageSure provides reliable DP3 coverage where hurricanes and severe weather are more prevalent, including Louisiana, New York, North Carolina, South Carolina, Texas, and Virginia.

WHO IS A DP3 POLICY RIGHT FOR?

As of 2022, approximately 34 percent of people in the U.S. rent versus own their home. If anyone—including family—uses your residential property for more than two weeks per year, regardless of whether they pay rent or not, you should consider a DP3 policy. This policy can provide added protection for your home, if you’re letting someone use portions of your residential property or the entire place.

If someone other than you occupies your home for less than two weeks, a DP3 policy may not be the best option. Instead, consider adding a home-sharing endorsement to your standard homeowners insurance policy for enhanced protection. An endorsement is a change or addition to your insurance policy that alters your coverage.

WHAT ARE THE EXCLUSIONS AND LIMITATIONS OF A DP3 POLICY?

Although an open peril policy, a DP3 does exclude risks like earthquakes and floods. However, you can choose to cover these types of perils with an endorsement.

You also typically won’t find a renter’s personal belongings covered under the policy. Renters can obtain renters insurance to protect these items. In fact, about 75 percent of renters are required by their landlords to have renters coverage.

WHAT’S THE DIFFERENCE BETWEEN DP3 AND HO3 POLICIES?

The key difference between a basic homeowners insurance policy (known as an HO3) and a DP3 policy is the coverage they provide and the intended use of the property they cover.

DP3 policies are designed for a single or multi-family rental and focus primarily on coverage for the structure, with options for liability coverage and loss of rental income. DP3 policies typically don’t include personal property coverage for tenants. Tenants typically need renters insurance to protect their personal belongings and liability.

HO3 policies are for owner-occupied homes and cover the house and its belongings, as well as provide liability protection. HO3 policies provide more comprehensive coverage compared to DP-3 policies, including coverage for personal property and liability for both the homeowner and household members.

HOW IS A DP3 POLICY DIFFERENT FROM DP1 AND DP2 POLICIES?

Insurance companies offer several types of dwelling fire policies, including DP1, DP2, and DP3, which vary in the level of coverage they provide. DP1 policies offer the most basic coverage, while DP3 policies offer the most comprehensive, with DP2 falling in the middle of the spectrum.

DP1 (Basic):

• Covers basic risks like fire and vandalism
• Usually pays based on the property’s current value (may be less)
• Limited coverage for the building; no personal property and no liability coverage

DP2 (Intermediate):

• Covers more risks, including theft and falling objects
• Choice between current value or replacement cost for the building
• Can cover other structures and personal property (up to limits)
• Optional liability coverage

DP3 (Comprehensive):

• Covers a wide range of risks
• Choice between current value or replacement cost for the building
• Includes coverage for other structures
• Optional liability coverage and loss of rental income protection

HOW DOES A DP3 POLICY COMPENSATE FOR LOSS?

DP3 policies provide replacement cost coverage for the property and other structures. Owners can opt for Actual Cash Value (ACV) coverage if they choose. For personal property (Coverage C) in a DP3 policy, the compensation provided is ACV.

ACV accounts for depreciation, or the wear and tear of an item over time, when determining the payout amount for a loss. The amount compensated for ACV coverage is often less than what it would cost to replace the item with a new one.

Meanwhile, replacement cost covers the expense of fixing or replacing damaged property to its pre-loss condition with no depreciation factored in.

Here’s an example of how it works:
Jane’s rental property roof is damaged by a severe hailstorm, a peril covered by her DP3 policy. The cost to repair or replace the 10-year-old damaged roof is $10,000.

With ACV coverage, which accounts for the depreciation of the roof due to wear and tear over time, her policy will cover a portion of the repairs. With a 10-year-old roof depreciated by 50 percent, according to the insurance adjuster’s assessment, Jane’s insurance company would pay her $5,000 as the actual cash value for the roof damage.

Actual Cash Value = Cost to replace the roof – Depreciation

With replacement cost value, Jane’s insurance company would pay her the full $10,000 (minus the deductible) to cover the cost of replacing the damaged roof with new materials of like kind and quality, regardless of depreciation.

Whichever type of landlord insurance you opt for, it’s essential to review your policy each year to ensure it still meets your needs. Often, as property conditions change, coverage may need to be adjusted accordingly. Work with your insurance agent to ensure you have the appropriate coverage to adequately protect your interests and your rental property.