DP-3 Policy for Landlords: What Does It Cover?

As a landlord, protecting your rental property is crucial to ensuring your investment remains stable and secure. Getting the right insurance coverage is one way to safeguard your assets. DP-3 insurance policy, also known as a Dwelling Fire Form 3 policy, is a specialized type of property insurance designed specifically for landlords. It provides comprehensive coverage for rental properties, including buildings, structures, and personal property.

What is a DP-3 Policy?

A DP-3 policy is a comprehensive type of insurance protecting residential rental properties against damage or loss. It is designed for homes used as investment properties or those with older roofs. Many homeowners insurance companies do not cover homes with roofs older than ten years in coastal states or homes used for short—or long-term rentals.

Although it’s often known as a dwelling fire policy, it covers more than fire-related damage or loss. It also protects against losses from windstorms, lightning, hail, and other risks except those expressly excluded from a policy. DP-3 insurance offers coverage on an open-perils basis; this means that your rental property is covered from all risks except named exclusions.

DP-3 policies are only available for property owners who do not reside on the property. So, if you have acquired a property you intend to use as a full-time rental, a DP-3 policy is right for you.

DP-3 coverage pays claims on a replacement cost (RCV) basis. So, when you file a claim for a covered peril, your insurer pays the replacement cost of the damage at current prices within your policy limits.

Key Coverage Areas

The key coverage areas of a DP-3 policy include:

Building and Structure Coverage

Building and structure coverage protects you from damage to the physical structure of the building, including the foundation, walls, roof, and windows. It also provides coverage against damages to detached structures like fences, garages, sheds, and barns. The insurance will not provide coverage to a structure specifically excluded from the policy.

Personal Property Coverage

Personal property coverage covers damage to items owned by you – the landlord – such as appliances, fixtures, and furniture. It allows you to protect your investment in the rental property and to minimize out-of-pocket expenses in case of damage or loss. DP-3 does not cover damage to items owned by the property’s residents.

Personal Liability Coverage

Personal liability coverage protects you from legal liability for accidents or injuries on your property. It protects your assets from being seized to settle a legal judgment or settlement. So, if a tenant slips and falls on an icy sidewalk or a guest is bitten by a dog, your DP-3 policy will cover your legal fees and their medical expenses.

Fair Rental Value Coverage (Loss of Rent)

Fair rental value coverage will compensate you for any lost rental income in case your property becomes uninhabitable because of a covered peril. If a covered event forces tenants to vacate the premises, the fair rental value coverage will help replace lost rental income, allowing you to continue meeting financial obligations like mortgage payments, property taxes, and insurance premiums.

Sewer and Drain Backup

Sewer and drain backup is an optional rider you can add to your DP-3 policy. It covers damage caused by the backup or overflow of sewage and water from drains and sewers. With this coverage, you can avoid significant out-of-pocket expenses to repair or replace damaged property and clean up contaminated water and sewage.

Sump Pump Overflow

Sump pump overflow is another optional feature of a DP-3 policy. It covers damage caused by a sump pump system overflow or failure. Like sewer and drain backup coverage, it protects you against significant costs that can arise from sump pump failure.

Who Needs a DP-3 Policy?

You may need a DP-3 policy if any of the following applies to you:

• You own a property with a roof older than ten years
• You rent out your home long-term
• You use your home for short-term rentals like Airbnb or Vrbo
• You own a vacation home

What are DP-3 Exclusions?

Insurance exclusions are events or perils not covered under an insurance policy. Since DP-3 insurance is an open-peril policy, all damage to your property or belongings is covered unless caused by a specifically excluded event. Standard DP-3 exclusions include damage or loss due to:

• Earth movement
• Power failure
• Ordinance or law
• Nuclear hazard
• Intentional loss
• War
• Intentional loss
• Mold
• Governmental action

It’s essential to go through the terms of your policy to know what perils are excluded. You may add a separate rider or endorsement to DP-3 to protect you from these perils if you think you are at risk.

Other Types of Dwelling Policies

While DP-3 offers the broadest dwelling policy coverage, DP-1 and DP-2 are other dwelling coverage policies that provide protection for rental or vacation properties. The difference between all three forms of coverage is the scope of protection they offer.

DP-1 and DP-2 policies offer named peril protection. This means that they only cover risks specifically listed on the policy. DP-1 insurance pays claims on an actual cash value (ACV) basis – this means that they deduct the depreciation cost of your structure or belongings from the final payout. However, it is cheaper than DP-2 and DP-3, which settle claims on a replacement cost basis.

DP-1 covers the fewest perils, DP-3 covers the most, while DP-2 lies somewhere in the middle. The dwelling policy most suitable for you as a landlord depends on your circumstances. If your insurance budget is tight, you may opt for a DP-1 policy, though your coverage may not be extensive. DP-1 coverage may also be suitable if you’ve just moved to a different residential home and are waiting for a tenant to move into an empty house.

Conclusion

DP-3 policy offers landlords and rental property owners comprehensive coverage for their investments. Landlords can mitigate risks associated with property ownership, including damage, liability and loss of income. The alternative dwelling coverage options also allow landlords to opt for a policy that best suits their needs, offering peace of mind and financial protection in the face of unforeseen events.