Start Here: 5 Things You MUST Know
DP policies do NOT cover personal liability - must add by endorsement.
60 days of vacancy = no glass breakage coverage.
DP-2 has 80% coinsurance on building structures (Coverages A & B).
The LAND is NOT insurable - only the building.
Rain damage = only covered if wind/covered peril FIRST created an opening.
First, Understand These Terms
What is an Endorsement?
An endorsement is a document that modifies your policy - it can add coverage, remove coverage, or change terms. Think of it as an "add-on" or "upgrade" to your basic policy.
Examples:
- Add coverage: "Personal Liability Supplement" endorsement adds liability protection to a DP policy
- Increase limits: "Inflation Guard" endorsement automatically increases your coverage limits each year
- Exclude something: Remove coverage for certain items or perils
The Coverage Letters: A, B, C, D
Property policies use letters to organize different types of coverage:
A
Dwelling
The main building/house itself
B
Other Structures
Detached garage, shed, fence
C
Personal Property / Contents
Your stuff - furniture, clothes, electronics
D
Loss of Use
Living expenses if you can't live there, or lost rental income
What is a Dwelling Policy?
A Dwelling Policy (DP) insures residential properties, often used for:
- Rental properties you own
- Vacation homes
- Properties that don't qualify for homeowners insurance
Coverage D: Two Types of Loss of Use
Fair Rental Value
If you RENT OUT the property: covers the rental income you lose while it's being repaired.
Example: You charge $1,500/month rent. Fire damages the property for 3 months = $4,500 covered.
Additional Living Expense (ALE)
If you LIVE IN the property: covers extra costs to live elsewhere while it's being repaired.
Example: Hotel bills, restaurant meals, temporary housing costs.
DP-1 only covers Fair Rental Value - no ALE! DP-2 and DP-3 cover both.
Key Difference from Homeowners
DP policies do NOT automatically include liability coverage - you must add it with a Personal Liability Supplement endorsement (an add-on you pay extra for).
The Three DP Forms
DP-1 Basic
Coverage Type:
Named Perils on dwelling AND contents
Coverage D:
Only Fair Rental Value (NO Additional Living Expense)
Based on Standard Fire Policy + Extended Coverage Endorsement. Most basic form available.
DP-2 Broad
Coverage Type:
Named Perils on BOTH dwelling AND contents
Coinsurance:
80% on Coverages A and B (see explanation below)
Coverage B (Other Structures) is IN ADDITION to other limits. Trees, shrubs, plants ARE covered.
DP-3 Special
Dwelling Coverage:
All-Risk (Open Perils)
Contents Coverage:
Named Perils (same as DP-2)
Best coverage! Dwelling covered for all perils except those specifically excluded. Contents same as DP-2.
Named Perils Covered by DP-2 and DP-3
When a policy is "Named Perils," these are the specific causes of loss that ARE covered:
If the damage was caused by something NOT on this list (like flood or earthquake), it's NOT covered under named perils.
What is 80% Coinsurance? (DP-2 Only)
Coinsurance means you must insure your property for at least 80% of its replacement value. If you don't, YOU pay part of every loss - even partial losses!
Example: What Happens If You Under-Insure
Your home's replacement value: $200,000
80% requirement: $160,000 minimum coverage needed
You only bought: $120,000 coverage (not enough!)
A fire causes: $40,000 in damage
The Penalty: You only get $120K/$160K = 75% of your loss paid. So you get $30,000, NOT $40,000. You're stuck paying the other $10,000 yourself!
Lesson: Always insure for at least 80% of replacement value to avoid the coinsurance penalty.
| Feature | DP-1 Basic | DP-2 Broad | DP-3 Special |
|---|---|---|---|
| Dwelling Coverage | Named Perils | Named Perils | All-Risk |
| Contents Coverage | Named Perils | Named Perils | Named Perils |
| Additional Living Expense | NO | YES | YES |
| Trees, Shrubs, Plants | NO | YES | YES |
| 80% Coinsurance | No | YES | No |
Exclusions & Special Rules
General Exclusions
War
Nuclear Hazard
Flood
Note: WIND is NOT excluded! Wind damage IS covered.
60-Day Vacancy Rule
After 60 days of vacancy, DP policies do NOT cover:
Breakage of Glass
Example: You own a rental property. Your tenant moves out and the place sits empty for 3 months. Someone throws a rock through the window. NOT covered - the place was vacant over 60 days.
Freezing of Plumbing
Freezing damage to plumbing is only covered if:
The HEAT was left ON
Example: You turn off the heat in your vacation home during winter to save money. Pipes freeze and burst. NOT covered! You should have left the heat on.
Special Coverage Rules
Rain or Dust Damage
Only covered if a covered peril FIRST created an opening in roof or walls.
COVERED: Wind blows off shingles, rain comes in through hole.
NOT COVERED: Rain seeps through old, deteriorating roof.
Other Structures (Coverage B)
Covers structures separate from the dwelling.
Includes: Private garage rented out to others
DP-2 Note: Coverage B is IN ADDITION to other limits - not counted against them!
Land is NOT Insurable
The land the dwelling sits on cannot be insured.
Why? Land doesn't get "damaged" the same way a building does. It's always there. You insure the STRUCTURE, not the dirt!
Inflation Guard
Also called "Automatic Increase Endorsement"
Must be added by endorsement - not included automatically. Increases coverage limits to keep up with rising construction costs.
Chapter 3 Cheat Sheet
Print for quick referenceDP-1 Basic
Named perils, no ALE, no trees
DP-2 Broad
Named perils, 80% coinsurance
DP-3 Special
All-risk dwelling, named perils contents
60 Days Vacant
No glass breakage coverage
Freezing
Only covered if heat was ON
Rain Damage
Only if opening made by covered peril
No Liability
Add by endorsement only
Land
NOT insurable
Inflation Guard
Must add by endorsement
Other Insurance
Pro-rata sharing
Private Garage
Coverage B - other structures
DP-2 ('02)
= 2002 ISO form
Exam Trap Alerts
1. DP-1 Has NO Additional Living Expense
DP-1 only provides Fair Rental Value, NOT additional living expense. The other forms do include ALE!
2. DP-3 Contents Are Still Named Perils
DP-3 is all-risk on the DWELLING only. Contents are still named perils (same as DP-2). Don't assume everything is all-risk!
3. Wind IS Covered
General exclusions are war, nuclear, flood - but NOT wind! Wind damage IS covered on DP policies.
4. 80% Coinsurance Only on DP-2
Only DP-2 has the 80% coinsurance requirement on Coverages A and B. DP-1 and DP-3 do not.
5. Vacancy = 60 Days, Not 30
Glass breakage excluded after 60 days of vacancy. Don't confuse with the 30-day rules in HO policies!