There are two key differences between DP1 and DP3 policies: DP1 only protects against nine perils and covers your property for its actual cash value. In other words, claim payouts will deduct depreciation. The DP3 policy is an open perils policy that covers the property for its replacement cost. That means you’ll receive the full amount it would take to replace or rebuild your property at today’s market rates.
|Building Coverage||Actual Cash Value||Replacement Cost|
|Perils Covered||9 Named Perils||All Perils|
|Fair Rental Value||Can Be Added||Included|
|Personal Property||Can Be Added||Included|
|Liability||Can Be Added||Included|
|Freezing Pipes||Not Covered||Covered|
The DP1, also known as the Dwelling Fire Form 1 policy, is an insurance policy that protects a structure that’s either vacant or leased to tenants. A standard DP1 offers building-only protection, but you can add on coverage for personal property and liability coverage for an extra cost.
This policy usually only covers damaged caused by these nine named perils:
In other words, if your property experienced damage from an incident not listed here, it wouldn’t be covered. That can leave your property vulnerable to some pretty common instances. For example, vandalism isn’t covered by a DP1 policy.
When you need to make a claim on a DP1 policy, be prepared for a settlement based on the actual cash value of the loss. This means you’ll receive the payout for the damage minus depreciation.
Say, for example, your roof is damaged in a windstorm. The roof is 13 years old, and the repairs cost $16,000. Whereas a replacement-cost policy might pay out that full $16,000, an actual cash value policy will take into account the useful years left in your roof and its depreciation. Insurers will often use a calculation like this to figure that out: R × (E - C) / E = ACV, where R = replacement cost of the item; E = expected life (lifespan) of the item; C = current life of the item; and ACV = actual cash value.
So if your roof has an expected life of 15 years, your actual cash value payout comes to:
$16,000 x (15-13) / 15 = $2,133
As you can see, that’s not going to be enough to cover the full cost of repairs. If you choose this policy, budget ahead and be prepared to pay more out of pocket during a claim.
Additionally, the DP1 policy will not cover loss of rental income – the amount paid when the property can’t be lived in during a claim.
Generally speaking, the DP1 is considered a bare-bones property policy for investors and landlords. It’s the least expensive type of dwelling fire form you can get.
A DP3, also known as a Dwelling Fire Form 3 policy, is a more robust policy than the DP1. It’s an open perils policy, which means it covers far more perils than the DP1. Rather than listing a few covered perils, the DP3 will cover all perils except those listed in the policy as exclusions. That means your property gets much, much more protection.
Some common DP3 exclusions are:
The DP3 policy also differs from DP1 in how it pays for losses. Whereas the DP1 pays based on the depreciated value, the DP3 pays based on the replacement value. That means the insurance company will pay for what it actually costs to replace or repair your property at today’s market rate with similar items, not a depreciated amount that leaves you short.
The DP3 is considered the most robust of the three dwelling fire forms because it also covers other structures, personal property on the site like appliances, fair rental value, liability, and medical payments.
Loss of rents is an important coverage for landlords. It covers lost rental income when the property is uninhabitable after a loss. That allows you to protect your income while the property is being repaired.
Typically, a DP1 policy is used for vacant properties (and properties that will be vacant for at least 30 days). These might be properties pending a sale or assumed in probate that don’t have the need for robust coverage. Investors who plan on rehabbing a property to flip might also get a DP1 policy.
However, if the property owner needs expanded coverage, the DP3 is usually the better policy. You might consider a DP3 policy if you want to:
A DP1 policy usually isn’t the best option for a property with tenants, but if you’re a landlord on a super tight budget, it’s an option to consider.
Let our experts help you find the dwelling fire policy that fits your needs and protects your investment. We crunch thousands of data points about your property to customize your coverage to fit your budget and your risks. To get a quote, apply online or give us a call.
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