Dwelling Policies: How the DP-1, DP-2 and DP-3 Forms Differ

The big idea: one house, three different rulebooks

A dwelling policy insures a residence: the house, separate buildings on the lot, and certain belongings. It works through a dwelling property form, which is a standard set of policy wording. DP-1, DP-2 and DP-3 are three of these forms. They answer two questions differently:

1. Which causes of loss are covered? A cause of loss, also called a peril, is whatever made the damage happen: fire, wind, a burst pipe.
2. How is a covered loss paid? This is the loss settlement rule. It is the policy's formula for turning damage into a dollar amount.

If you can answer both questions for each form, you can read a loss scenario, decide whether it is covered, and name the basis for payment.

This lesson reads three published specimen forms. A specimen is a sample copy of the policy wording. The three are a 1988 DP-1 "basic" form, a 1988 DP-2 "broad" form and a 2002 DP-3 "special" form. Wording can change between editions and between insurers. For a real policy, the forms, declarations and endorsements actually issued with it are what count.

What you'll be able to do

• Decide whether a cause of loss is covered under the DP-1 form, using the peril premiums shown in the declarations.
• Apply the DP-1 payment rule: value at the time of loss, capped at the cost to repair or replace.
• Explain what DP-2 adds to DP-1: more listed causes of loss, and new-for-old payment for qualifying buildings.
• Explain what DP-3 changes from DP-2: buildings are covered unless a cause is excluded, but belongings are still covered only for listed causes.
• Tell lost rent apart from extra living costs, and say what a form's name does not prove.

Before you start

You should already be comfortable sorting a loss into coverage parts, as practiced in Map a homeowners loss to the right coverage. The payment examples connect to Value damaged property correctly and Calculate deductibles, limits and coinsurance. This lesson still explains every figure it uses.

The parts of a dwelling policy: what property is insured

A dwelling policy is divided into coverage parts, labeled with letters. Each part is a separate bucket of protection with its own limit, which is the most the policy will pay from that bucket.

• Coverage A – Dwelling: the house itself and anything attached to it, such as an attached garage. It also includes materials kept on site to build or repair the house.
• Coverage B – Other Structures: structures on the property that stand apart from the house with clear space between them, such as a detached garage or shed. A connecting fence or utility line does not make a structure "attached."
• Coverage C – Personal Property: belongings of the kind found in a home that the named insured, or family members living with them, own or use, while the belongings are at the insured location.
• Coverage D – Fair Rental Value: rent the owner loses, explained below.
• Coverage E – Additional Living Expense: extra living costs, explained below.

Land is not covered, including the land under the house.

The declarations is the policy's summary page. It shows who is insured, where, the limits and the premiums. All three forms say the insurance applies only to coverage parts that have a limit shown and to perils that have a premium shown. A coverage part printed in the form does nothing unless the declarations switch it on.

A landlord's policy does not cover the tenant's belongings. Suppose Jordan owns a house, rents it to a tenant and insures it under a dwelling policy. The tenant's couch is not Jordan's property, and the tenant is not part of Jordan's household. So the couch falls outside Coverage C on Jordan's policy. Insuring the building does not extend coverage to everything inside it.

Lost rent and extra living costs: two different losses

These two coverage parts are easy to mix up because the same fire can trigger both. Each one answers a different question.

• Coverage D (Fair Rental Value) asks: how much rental income did the owner lose? Suppose a covered loss makes a part of the property that is rented out, or held for rent, unfit to use. Coverage D pays the rent that part would have earned, minus any of the owner's costs that stop while it sits unusable.
• Coverage E (Additional Living Expense) asks: how much more is the insured's own household spending to live normally? It pays the necessary increase in living costs, such as temporary housing above what the household normally spends, so the household can keep its usual standard of living.

Both are triggered only when a covered peril damages Coverage A, B or C property and that damage makes the place unfit. Both pay for the shortest time reasonably needed to repair or replace.

The DP-1 specimen's coverage parts run A through D only, so it has no additional living expense part. The DP-2 specimen includes both D and E.

Example. Sam owns a duplex, lives in one side and rents out the other. A covered fire makes both sides unlivable. - The rent Sam stops receiving from the tenant's side is a Coverage D loss. - Sam's own extra cost of renting a temporary apartment, beyond Sam's normal housing costs, is a Coverage E loss. - Under the DP-1 specimen, Sam could claim the lost rent under Coverage D, but the form has no part for Sam's extra living costs.

Check: Riley owns a single-family house, rents all of it to a tenant, and insures it under the DP-2 form. A covered fire makes the house unlivable for three months. Which of these, if any, does Riley's policy address? (a) The tenant's ruined clothing. (b) Three months of rent Riley does not receive. (c) The tenant's motel bills.

DP-1, the basic form: which causes of loss count

The DP-1 form uses named perils. The form lists the causes it covers, and a loss from any cause not on the list is not covered. Think of it as a guest list: if a cause is not named, it does not get in.

In the DP-1 specimen, the list has three layers. The declarations show which layers were bought.

• Always included: fire or lightning, and internal explosion. Internal explosion means an explosion inside the dwelling, inside another covered structure, or inside a structure holding covered belongings. Electric arcing, a broken water pipe and the operation of a pressure-relief device do not count as explosions. Neither does an explosion of steam boilers or steam pipes that the insured owns, leases or controls.
• Added when the declarations show a premium for Extended Coverage: windstorm or hail; explosion anywhere, which replaces internal explosion and keeps the same carve-outs; riot or civil commotion; aircraft; vehicles; smoke; and volcanic eruption.
• Added when the declarations show a premium for Vandalism or Malicious Mischief: deliberate damage to the property.

Each named peril also comes with fine print that can change an answer:

• Windstorm or hail: rain, snow, sand or dust that gets inside is covered only if wind or hail first breaks an opening in the roof or a wall.
• Vehicles: damage caused by a vehicle owned or driven by the named insured or a resident is not covered. Damage by any vehicle to fences, driveways or walks is not covered either.
• Smoke: the damage must be sudden and accidental. Smoke from fireplaces is not covered.
• Vandalism or malicious mischief: theft is not included. Glass that is part of the building is not included, except glass blocks. Nothing is covered if the dwelling had been vacant for more than 30 days in a row just before the loss.

Worked example: the same storm, two selections

Dana insures a rental house under the DP-1 form. The declarations show a Coverage A limit and a premium for the always-included perils only. They show no Extended Coverage premium and no vandalism premium. A windstorm rips off part of the roof.

1. Name the cause: windstorm.
2. Check which layers were bought: only the always-included layer.
3. Look for windstorm in that layer: it is not there, so the roof damage is not covered.

Now change one fact. The declarations also show an Extended Coverage premium. Windstorm is now a listed peril, so the roof damage is covered, subject to the rest of the policy. Rain that pours in through the torn roof also falls within the windstorm peril, because the wind made the opening first.

Same house, same storm. Only the selection on the declarations changed, and that changed the answer.

The tempting mistake: saying "DP-1 covers only fire" or "DP-1 covers wind." Both skip the step that decides the answer, which is reading the declarations.

Check: Morgan's DP-1 declarations show premiums for the always-included perils and for Extended Coverage. They show no vandalism premium. Decide each case. (a) Someone spray-paints graffiti across the siding. (b) A delivery driver backs a van into the front wall. (c) Morgan backs their own pickup truck into the front wall.

How DP-1 pays: value at the time of loss (actual cash value), capped at repair cost

In the DP-1 specimen, every covered property loss is paid the same way. That includes the building and the belongings. The policy pays actual cash value at the time of loss, but never more than the amount needed to repair or replace the damaged property.

• Actual cash value (ACV) means what the damaged property was worth as it stood when it was damaged, not what it would cost brand new. The forms set it against replacement cost "without deduction for depreciation." So ACV is the measure that accounts for depreciation, which is loss of value from age and wear. How ACV is calculated is taught in Value damaged property correctly. In this lesson, ACV figures are given to you as assumptions.
• Replacement cost means the cost to repair or replace with material of like kind and quality today, with no deduction for depreciation.

Worked example: older kitchen, fire damage

A covered fire damages the kitchen in Dana's house. Fire is always included, so the selections don't matter here. Assume: - the repair cost is $18,000; - the ACV of the damaged part is $11,000, because the cabinets and counters were 20 years old; - the Coverage A limit is $150,000; - no deductible applies in this example.

1. Find the ACV: $11,000.
2. Find the cap, which is the repair cost: $18,000. The ACV is below the cap.
3. Basis for payment: $11,000.

DP-1 pays less than the repair bill because it pays the value of what was lost, which was 20-year-old cabinets. It does not pay for new ones.

Change one fact to see the cap at work. The same fire leaves a scorch mark on Dana's solid-wood dining table. The table's ACV is $1,200, and a refinisher can restore it for $300. The basis is $300, because the policy pays no more than it costs to repair. The cap prevents the policy from paying more than the damage actually costs to fix.

Check: A DP-1 policy includes Extended Coverage. A covered smoke loss requires $9,500 of repairs to walls and ceilings, and the ACV of the damaged part is $6,000. A rug with an ACV of $400 can be cleaned back to its earlier condition for $150. Assume no deductible applies. What is the basis for each payment, and why isn't the walls figure $9,500?

DP-2, the broad form: more named causes of loss, and a two-track payment rule

Causes of loss: a longer list, but still a list

The DP-2 specimen lists 16 perils in one list, with no separate layers to buy within the perils section. It includes every DP-1 peril, from fire through vandalism, and adds these:

• Damage by burglars
• Falling objects
• Weight of ice, snow or sleet
• Accidental discharge or overflow of water or steam from a plumbing, heating, air-conditioning or fire-sprinkler system, or from a household appliance
• Sudden and accidental tearing apart, cracking, burning or bulging of a steam or hot-water heating system, an air-conditioning or sprinkler system, or a water heater
• Freezing of those systems or of a household appliance
• Sudden and accidental damage from artificially generated electrical current, meaning man-made electrical current rather than lightning

DP-2 still uses named perils. If the cause is not on the list, the loss is not covered.

This fine print changes answers:

• Damage by burglars is not theft. It covers the damage burglars cause, such as a pried-open door. It does not cover what they carry away. It also does not apply if the dwelling had been vacant for more than 30 days in a row just before the damage.
• Falling objects: damage inside the building, or to belongings in it, is covered only if the falling object first damages the roof or an outside wall. Outdoor antennas, outdoor equipment, awnings and fences are not covered under this peril. The object that fell is not covered.
• Weight of ice, snow or sleet: covers the building and belongings inside it. It does not cover awnings, fences, patios, pavement, swimming pools, foundations, retaining walls, piers or docks.
• Water discharge: gradual leakage over weeks, months or years is not covered. Neither is the system or appliance the water escaped from.

Same peril name, different fine print. In DP-2, the vehicles peril leaves out only damage to a fence, driveway or walk caused by the insured's or a resident's own vehicle. Go back to Morgan backing their pickup into the front wall. Under DP-1 that was not covered. Under DP-2 it is covered, because a wall is not a fence, driveway or walk.

Worked example: a break-in

Avery insures their home under the DP-2 form, and the home was occupied at the time. Burglars smash a window, pry open the back door, and take a laptop and a TV.

• Window and door: damage caused by burglars, so it is covered.
• Laptop and TV: taking property is theft. Theft is not a listed peril, and both the vandalism peril and the burglar-damage peril exclude it. These items are not covered under this form.

Change one fact. While inside, the burglars also slash Avery's couch. That is damage to covered personal property caused by burglars, so the couch is covered. What separates it from the TV is damage versus taking: the couch was damaged, while the TV was taken.

Check: Under the DP-2 form, decide each case. (a) During an ice storm, a tree limb crashes through the roof and breaks a bed underneath. (b) Heavy snow piles against the backyard fence until it collapses. (c) A slow drip under the bathroom sink, unnoticed for months, rots the subfloor.

Payment: belongings at their value when damaged (ACV), qualifying buildings at new-for-old cost (replacement cost)

DP-2 splits payment into two tracks.

Track 1, actual cash value capped at repair cost (the same rule as DP-1): - personal property; - awnings, carpeting, household appliances, outdoor antennas and outdoor equipment, whether or not they are attached to a building; - structures that are not buildings.

Track 2, replacement cost for buildings under Coverage A or B, with these conditions:

• The 80% test. Compare the insurance on the damaged building with 80% of its full replacement cost, which is the cost to rebuild the entire building new, measured just before the loss. The form leaves certain items out of that full replacement cost figure, such as underground pipes and wiring and supports below the lowest basement floor.
• If the insurance is 80% or more of full replacement cost: the policy pays the repair cost with no deduction for depreciation, after any deductible. Payment is limited to the smallest of three amounts: the limit; the replacement cost of the damaged part; and the amount actually spent.
• If the insurance is under 80%: the policy pays the larger of two amounts, but never more than the limit. One amount is the ACV of the damaged part. The other is a proportion of the repair cost, calculated as (insurance ÷ 80% of full replacement cost) × repair cost.
• Timing: until the repair or replacement is finished, the policy pays no more than ACV. The exception is a repair cost that is both under 5% of the building's insurance amount and under $2,500. The insured may also take ACV first and, within 180 days after the loss, claim the remaining replacement cost.

Worked example: a roof on a rental house

Taylor insures a rental house under the DP-2 form. Assume: - full replacement cost just before the loss is $300,000; - the Coverage A limit is $250,000; - a covered windstorm damages the roof; - the repair cost is $20,000, and the ACV of the damaged part is $13,000; - repairs are finished and cost exactly $20,000; - no deductible applies in this example.

1. Find 80% of full replacement cost: 0.80 × $300,000 = $240,000.
2. Compare: $250,000 is at least $240,000, so the policy passes the test.
3. Find the smallest of the three amounts: the $250,000 limit, $20,000 replacement cost of the damaged part, and $20,000 actually spent. The payment is $20,000.
4. Check the timing: before the work was finished, could Taylor get more than ACV? 5% of $250,000 is $12,500. The $20,000 repair is not under that, so the small-repair exception fails. Until repairs were done, payment was capped at the $13,000 ACV.

Compare DP-1. Under DP-1 with Extended Coverage, the same roof loss would be paid at $13,000, which is the ACV, below the $20,000 cap. That holds no matter how much insurance Taylor carries.

Change one fact: the Coverage A limit is $180,000 instead.

1. $180,000 is less than $240,000, so the test fails.
2. Option one, ACV: $13,000.
3. Option two, the proportion: $180,000 ÷ $240,000 = 0.75, and 0.75 × $20,000 = $15,000.
4. Take the larger amount: $15,000.

The tempting mistake: dividing by the full replacement cost instead of 80% of it. That gives $180,000 ÷ $300,000 = 0.60, and 0.60 × $20,000 = $12,000. The form's measuring stick is 80% of full replacement cost, not 100%.

Check: Quinn insures a house under the DP-2 form. Assume: - full replacement cost just before the loss is $400,000, and the Coverage A limit is $300,000; - a pipe suddenly bursts, and the water damages the walls and floors; - the wall and floor repair cost is $16,000, the ACV of that damage is $9,000, and repairs are finished; - the water also ruins a dishwasher that would cost $1,000 new and has an ACV of $350; - no deductible applies.

What is the basis for payment on the building damage and on the dishwasher?

DP-3, the special form: buildings covered unless excluded, belongings covered only for listed causes

Two rules inside one form

For Coverage A and B, the DP-3 specimen does not list causes of loss. It covers direct physical loss to the dwelling and other structures unless the policy excludes it. This approach is called open perils. The question you ask changes from "Is the cause on the list?" to "Is the cause excluded?"

Exclusions for the dwelling and other structures in this specimen include: - wear and tear, deterioration and mechanical breakdown; - rust, mold, and wet or dry rot; - settling or cracking of foundations, walls, floors and roofs; - birds, vermin, rodents, insects and domestic animals; - constant or repeated seepage of water or steam over weeks or longer; - theft of property that is not part of the building; - vandalism or theft when the dwelling had been vacant for more than 60 days in a row; - the general exclusions that apply throughout the form, such as earth movement, flood and surface water, sewer backup, ordinance or law, power failure away from the location, neglect, and war.

For Coverage C, personal property, DP-3 still uses named perils. It has a 16-peril list that follows the same pattern as DP-2, with the same kinds of fine print. Burglar damage still does not include theft. Damage from falling objects inside the building still requires the roof or an outside wall to be hit first.

Worked example: one spill, two answers

Jamie lives in their own home, insured under the DP-3 form with Coverage A and C limits. While painting, Jamie knocks over a gallon of paint. It spills across the hardwood floor and onto the sofa. Assume no exclusion in the issued policy applies to an accidental spill like this.

• Floor: part of the dwelling, so Coverage A. A uses open perils, this is an accidental direct physical loss, and by our assumption it is not excluded. Covered.
• Sofa: personal property, so Coverage C. C uses named perils. Spilled paint is not fire, not smoke and not vandalism, because it was an accident. It is also not water escaping from a plumbing system or appliance. Not covered.

The sofa cannot ride along on the floor claim. Each item of property is tested under its own coverage part's rule, even when the same event damages both.

Compare DP-2: the floor would fail there too, because a paint spill is not on the DP-2 list. The covered floor is the difference DP-3 makes.

Change one fact. Instead of a paint spill, the furnace has a puffback that blows soot across the floor and the sofa. Sudden, accidental smoke, including puffback from a furnace, is a listed Coverage C peril. Now the sofa is covered, and the floor is covered under Coverage A as before.

Payment under DP-3

The DP-3 specimen pays the way DP-2 does. Belongings, appliances, carpeting, awnings, outdoor equipment and structures that are not buildings are paid at ACV, capped at repair cost. Buildings under A or B get replacement cost under the same 80% test. Payment stays at ACV until repairs are finished, unless the repair is both under 5% of the insurance and under $2,500. The insured can take ACV first and notify the insurer within 180 days after the loss of their intent to claim the rest.

So in these specimens, DP-3 differs from DP-2 in which causes are covered for buildings. It does not differ in the payment rule, and it does not broaden protection for belongings.

The tempting mistake: reading "special form" as "everything is covered." The building is still subject to exclusions. Belongings still need a listed peril. And none of the 16 personal property perils is theft.

Check: Under the DP-3 form, decide each case. (a) Squirrels chew holes through the siding. (b) The owner drops a heavy toolbox and cracks the bathtub; assume no exclusion applies to this accident. (c) The same dropped toolbox smashes a laptop sitting on the bathroom counter. (d) Thieves walk in through an unlocked door and take the TV.

What the name "dwelling policy" does not tell you

• It does not show liability coverage. Liability coverage protects you when someone claims you are legally responsible for their injury or damage. The DP-3 specimen is labeled as Section I, dwelling property, and all three forms describe property coverage. None of them, read alone, shows liability protection. If a question involves liability, look for other forms issued with the policy.
• It does not show theft coverage for belongings. Theft of belongings is not among the listed perils in any of the three specimens. To learn whether a specific policy covers it, find the coverage in the issued forms or endorsements, which are add-on forms that change the policy.
• A DP-1 label does not show which perils were bought. Only the declarations tell you that.

Mixed practice: on your own

Use only the specimen rules from this lesson. Unless stated, assume no deductible, and assume no exclusion applies beyond those named in the lesson.

1. Lee insures a rental house under the DP-1 form. The declarations show premiums for the always-included perils and for vandalism, but not for Extended Coverage. (a) Hail cracks the roof. Is it covered? (b) Separately, vandals damage the siding after the house has been vacant for 45 days in a row. Is it covered?

2. Lee's hail damage happens instead under the DP-2 form. Assume: - full replacement cost is $250,000, and the Coverage A limit is $200,000; - repair cost is $12,000, and ACV is $7,000.

(a) What is the basis for payment once repairs are finished at $12,000? (b) What is the most Lee can receive before the work is finished? (c) What would the DP-1 form with Extended Coverage pay for the same loss?

3. Compare DP-2 and DP-3 for two building losses. (a) A pipe inside a wall leaks slowly for months and rots the drywall. (b) A visiting friend swings a ladder and punches a hole in a wall.

4. Robin lives in one unit of a duplex they own and rents out the other. A covered fire makes both units unlivable. Which coverage parts address Robin's lost rent and Robin's own extra housing costs under the DP-2 form? Under the DP-1 form?

What to remember

• Start every coverage question by naming the cause of loss and the coverage part of the damaged property.
• For named perils, find the peril on the list and then read its fine print. For DP-3 buildings, look for an exclusion instead.
• For DP-1, the declarations decide which perils exist on that policy.
• The 80% test divides by 80% of full replacement cost, and exactly 80% passes.
• Lost rent (Coverage D) and extra living costs (Coverage E) protect different interests. The DP-1 specimen has only D.
• A form's name proves neither liability coverage nor theft coverage. Look in the issued forms and endorsements.