Are you looking to rent out your primary residence or purchase another home as an investment property? Has your insurer stated your homeowners coverage will not be valid in cases like these?
Having the right insurance policy is an essential aspect of property investment. A few damages could set you back thousands of dollars or lead to financial distress. But what coverage is the best when you have a residential property in the market, and your homeowners policy can’t be used?
That's when you'll want to acquire a DP3 policy. This article will explain what the DP3 policy is and why you should get one.
What is a DP3 Insurance Policy?
A DP3 policy is one of the three policies under Dwelling Fire Insurance policies. It is an open peril policy, covering all perils unless the insurer has stated specific exclusions. For instance, if the insurance company says that they do not cover risks from political unrest, it will not compensate you for any damages from such peril.
DP3 coverage pays claims on replacement cost value (RCV) instead of actual cash value (ACV). When you make a claim for a covered peril, the insurer pays the replacement cost of the damages within your policy limits and at current prices.
On the other hand, actual cash value, commonly used with the DP1 policy, deducts the property's depreciation cost from your final payout, which may result in not having enough money to pay for a replacement at today’s prices.
To illustrate, let's say you own an extra home that's 10 years old. You need to make significant repairs after a hailstorm causes substantial damage. These repairs are estimated to cost around $25,000.
If you have the DP3 policy, your insurer will reimburse you the replacement cost for these damages at the current market prices of items. However, if you were under DP1 that uses ACV, you would receive $25,000 less the depreciated value of the items damaged. In other words, you will receive less money under an ACV policy, leaving you with part of the bill to pay for using your own cash.
Perils Covered by DP3 Insurance
Thanks to its broad coverage, the DP3 policy is one of the most popular options. As an open peril policy, it typically covers all risks property owners experience unless otherwise stated in the policy. These include:
DP3 policy provides coverage against damages on the property's primary structure and detached structures, like fences, sheds, pool houses, and garages.
However, if your policy names an exclusion, the insurer will not provide coverage for any damages by the said exclusion. These are not definite and vary between insurance companies.
They include floods, acts of terror, mold damage, intentional damage, and neglect. It also excludes ordinance or law and water backup and sump pump overflow. O&L is where you are required by law or ordinance to meet current building codes when rebuilding your property. Water back up is necessary when certain causes of water loss are excluded from the general policy (like a sump pump overflowing in the basement or water backing up from a shower drain.) Check your quote or policy to see if these coverages can be added for an additional cost.
Loss of Use
This policy reimburses you for lost income up to your policy limit when the property is not in use. However, the cause of the loss must be from a covered peril. The damage must also make the property uninhabitable, and current tenants have to move out, or no tenant can move in until the property is completely repaired.
Assume someone is injured on your property, and you are found liable. Could you afford to cater to their medical costs and legal fees? Maybe yes. But would this take a toll on your finances? Absolutely. That's where personal liability coverage comes in—to cater to such costs if an injured party sues you and you are found liable for damages.
Most DP3 policies will cover personal property furnished for use by the tenants, such as appliances. However, if you need additional coverage for household furniture for a fully-furnished short-term or vacation rental property , you may want to speak directly with an insurance agent to confirm you have the proper coverage.
When is a DP3 Policy Needed?
This policy is only available for residential property owners who do not reside on the property. For example, maybe you have bought a new home and intend to make it your primary residence, leaving your current place to a tenant. Or perhaps, you have purchased a single-family home or small multifamily property to use as a full-time rental.
Homeowners insurance only covers owner-occupied residential properties. It also may not provide coverage for damages made by tenants if you are renting part of your primary residence. That's where a DP3 policy might be ideal for you.
Keep in mind that the DP3 policy does not cover seasonal residences or residences that will be vacant for an extended period (like more than 60-90 days). Such properties are considered a higher risk because no one is there to keep track of any damages. A small undiscovered leak in a vacant property could lead to more damages that would have been fixed earlier if the house had been occupied.
You will need different insurance coverage if you have a vacation home or suspect your extra residential home will be vacant for a while. Insurance companies usually provide vacant property policies to cover such properties. Another option would be a DP1 policy. Neither of these cover theft and vandalism. However, some insurers may be able to add them to vacant property insurance coverage.
First, you could opt for the DP1 policy. It is the most basic policy of the three, covering fewer perils. The DP1 policy is a named policy coverage that covers only nine perils. It also pays claims less the depreciation cost of the property, leading to a lower payout for a covered claim. Affordable as this option might be, as a rule of thumb, it is only advisable to get it if your property will be vacant for an extended period or you are on a tight budget.
A second option is a DP2 policy, touted as the middle-of-the-road policy of the three options.
It is more affordable than a DP3 policy and covers more perils than the DP1 policy. In fact, it provides coverage against 18 perils, including burglary, flooding, freezing pipes, and vandalism that are not available under the DP1 policy.
However, it may not cover personal liability or personal property. If you have personal items on the property and would like to protect yourself if someone incurs injuries on your property, the extra cost of the DP3 policy would be worth it.
Where to Find a DP3 Policy for Rental Property
Getting an insurance policy is one thing, but obtaining it from a provider that promises more than it can deliver may cause more harm than good. That's why finding a broker who can assist you in selecting the appropriate property coverage and real estate investment protection is so essential.
Here are four options for finding the best DP3 policy for your rental property:
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You can obtain easy, affordable, and adequate coverage entirely online through a landlord insurance quote. Furthermore, there are no paper applications to complete or lengthy waiting periods.
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Your existing insurance provider or broker is another option for finding landlord insurance. This may be the path of least resistance because you won't have to do much research or compare many quotes from several carriers yourself.
However, while going to an insurance agent may be the most obvious choice, it isn't necessarily the best way to obtain landlord insurance. That’s because some insurance carriers compete by offering a low-priced policy with limited coverage and poor customer service when a claim is submitted.
Real estate investors who have already “been there, done that” are another way to find landlord insurance. People are usually more than willing to discuss their experiences with insurers and lessons learned and recommend coverage or an agent they've used.
Finding the best landlord insurance might be as easy as connecting with other real estate professionals through social media, networking events, or trade shows. Insurance companies often have booths set up at events where you can meet a representative face-to-face and learn more about the ins and outs of landlord insurance.
DP3 policy is excellent insurance coverage for landlords to consider. It is an open peril policy that pays replacement cost value during a claim. As an open peril policy, it protects you against most perils.
However, insurers can name exclusions of risks they will not cover in the policy. Therefore, if you opt for a DP3 policy, it is crucial to compare exclusions between insurers. Any named exclusion, like floods or earthquakes, means the insurer will not reimburse you if your property incurs damages due to excluded perils like these.