What Is a DP3 Policy? The Gold Standard for Landlords

A DP3 policy is a specialized form of dwelling property insurance for properties not occupied by the owner. It provides comprehensive protection for landlords, safeguarding investment properties against various risks. Commonly used for rental homes, investment properties, and vacation homes when rented out, a DP3 policy helps landlords mitigate potential losses from property damage or liability claims.

Core Components of a DP3 Policy

A DP3 policy is structured with several key coverages designed to protect a landlord’s interests in a non-owner occupied property.

Coverage A: Dwelling

Coverage A, Dwelling coverage, protects the physical structure of the main residential building, including the foundation, walls, and roof.

Coverage B: Other Structures

Coverage B protects other structures on the property detached from the main dwelling, such as detached garages, sheds, fences, and guesthouses.

Coverage C: Personal Property

Coverage C addresses the landlord’s personal property on the premises for rental operations, such as appliances or maintenance equipment. This coverage does not extend to the tenant’s personal property, which requires the tenant to obtain their own renters insurance.

Coverage D: Fair Rental Value or Loss of Use

Coverage D, Fair Rental Value or Loss of Use, compensates landlords for lost rental income if a covered peril renders the property uninhabitable. This helps bridge the financial gap during the period of repair or rebuilding, often for a duration such as 180 days or the time needed for repairs, whichever is shorter.

Coverage E: Personal Liability & Coverage F: Medical Payments to Others

Coverage E offers Personal Liability protection, covering legal defense costs and damages if the landlord is found legally responsible for bodily injury or property damage to others on the rental premises. Typical liability limits can range from $100,000 to $300,000. Coverage F, Medical Payments to Others, provides medical expenses for individuals, other than residents, who are injured on the property, regardless of fault.

Understanding Perils and Coverage Types

The distinction between “open perils” and “named perils” is fundamental to understanding the breadth of a DP3 policy’s protection.

Open Perils

For the dwelling and other structures (Coverages A and B), a DP3 policy operates on an “open perils” basis. This means it covers all direct physical losses unless a specific peril is explicitly excluded in the policy language. Commonly covered events under an open perils policy include fire, windstorm, hail, and vandalism. Conversely, typical exclusions often listed in DP3 policies are floods, earthquakes, neglect, intentional acts, war, and governmental action. The burden of proof in an open perils policy rests on the insurer to demonstrate that an exclusion applies if a claim is denied.

Named Perils

In contrast, personal property coverage (Coverage C) within a DP3 policy is generally provided on a “named perils” basis. This means coverage is only extended to losses caused by perils specifically listed in the policy. Examples of named perils often include fire, lightning, explosion, smoke, vandalism, and theft. If a peril is not explicitly named, the damage resulting from it would not be covered.

Claim Settlement

Regarding how claims are settled, DP3 policies typically provide Replacement Cost Value (RCV) for the dwelling and other structures. RCV covers the cost to repair or rebuild the damaged property without deduction for depreciation, allowing the landlord to restore the property to its original condition. For personal property (Coverage C), Actual Cash Value (ACV) is commonly used, which pays the replacement cost minus depreciation. However, Replacement Cost Value for personal property may be available through an optional endorsement.

Distinguishing DP3 from Other Property Insurance Policies

Understanding the nuances between various property insurance policies helps clarify why a DP3 policy is often considered the preferred option for landlords.

DP1 Policy

A DP1 policy, the most basic dwelling fire form, offers limited protection based on named perils, typically covering only a few events like fire and lightning. Claims under DP1 are usually settled on an Actual Cash Value (ACV) basis, meaning depreciation is factored into the payout. Its narrow scope and ACV settlement make DP1 generally less suitable for landlords seeking comprehensive protection for their investment.

DP2 Policy

The DP2 policy provides broader named-peril coverage than DP1, encompassing more events such as vandalism, windstorm, and freezing. While it often provides Replacement Cost Value for the dwelling, it remains a named-peril policy, meaning only listed events are covered. The DP3 policy surpasses both DP1 and DP2 by offering open-perils coverage for the dwelling, providing significantly broader protection against a wider array of risks.

HO3 Homeowner’s Policy

An HO3 homeowner’s policy is designed for owner-occupied residences, offering open perils coverage for the dwelling and named perils for personal property. This policy is fundamentally different from a DP3 because it is intended for a primary residence, not for properties rented to others. An HO3 policy would not provide adequate coverage for a non-owner occupied rental property, leaving a landlord exposed to significant risks.

Other Policy Types

Other policy types, such as HO4 (renters insurance) and HO6 (condo insurance), serve distinct purposes. HO4 policies are for tenants, covering their personal belongings and liability within a rented unit. HO6 policies are specifically for condominium unit owners, covering the interior of their unit. Neither of these policies provides the necessary structural or liability coverage a landlord requires for a rental property. DP3 policies are specifically tailored to address the unique needs and exposures faced by landlords, making them a robust choice for investment properties.