2.1 Dwelling Property Policies (DP-1, DP-2, DP-3) & Basic Perils

Dwelling Property Policies (DP-1, DP-2, DP-3) & Basic Perils

Quick Summary: The ISO Dwelling Property program provides property insurance for residential structures that do not qualify for a standard Homeowners package policy—most commonly tenant-occupied rental properties, seasonal residences, or older dwellings. While Homeowners policies automatically bundle property and personal liability, Dwelling policies are monoline property contracts. The three primary forms—DP-1 Basic, DP-2 Broad, and DP-3 Special—escalate from basic named perils settled at Actual Cash Value (ACV) to open perils on structures settled at Replacement Cost (RC).

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Purpose and Eligibility of the Dwelling Property Program

The Dwelling Property Program was developed by the Insurance Services Office (ISO) to insure residential properties that underwriters cannot or will not insure under standard Homeowners policies. Understanding the underwriting eligibility and structural limitations of dwelling forms is essential for claims adjusters investigating residential property losses.

Eligibility Criteria

To qualify for coverage under an ISO Dwelling Property policy, a residential structure must meet strict guidelines:

• Residential Purpose: The structure must be used primarily for dwelling purposes. It can contain no more than four family units (single-family through fourplex) and house no more than five roomers or boarders in total.
• Occupancy Flexibility: The dwelling may be owner-occupied or tenant-occupied (such as a landlord rental property).
• Special Occupancies: Dwellings under construction, seasonal cottages, vacation homes, and permanently located mobile homes (typically on DP-1 only) are eligible.
• Incidental Business Occupancy: Rating rules permit certain low-hazard incidental occupancies, such as a professional office or a small instructional studio, when they are incidental to the dwelling use. Insurers set the exact limits in their underwriting rules. Dwellings used mainly for manufacturing, retail sales, or other substantial commercial activity are ineligible.

The Monoline Structure

A critical distinction between Dwelling policies and Homeowners policies is that dwelling policies are monoline property contracts. An unendorsed dwelling policy covers direct and indirect physical property loss only. It does not include:

1. Personal Liability: Coverage for bodily injury or property damage to third parties is absent unless the policyholder attaches the Personal Liability Endorsement (DL 24 01) or purchases a separate standalone Comprehensive Personal Liability (CPL) policy.
2. Theft of Personal Property: Unendorsed dwelling forms do not cover the theft of contents. An insured must purchase the Broad Theft Coverage Endorsement (DP 04 72) for owner-occupants or the Limited Theft Coverage Endorsement for landlords.

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Core Property Coverages (Coverages A Through E)

The ISO Dwelling program organizes property protections into five core coverage categories, designated as Coverages A through E.

+-------------------------------------------------------------+
|               ISO DWELLING POLICY COVERAGES                 |
+-------------------------------------------------------------+
| Coverage A: Dwelling (Primary Residential Structure)        |
| Coverage B: Other Structures (Detached Garages, Sheds, 10%) |
| Coverage C: Personal Property (Household Contents, Opt.)    |
| Coverage D: Fair Rental Value (20% of A, current forms)    |
| Coverage E: Additional Living Expense (DP-2 & DP-3 Only)    |
+-------------------------------------------------------------+

Coverage A – Dwelling

Coverage A insures the residential building and all structures attached directly to it, such as an attached garage, attached carport, breezeway, or deck. It also covers:

• Permanently installed fixtures, equipment, and building machinery (e.g., central heating and air conditioning units, water heaters, built-in cabinetry).
• Materials and supplies located on or adjacent to the described location used in the construction, alteration, or repair of the dwelling or other structures.
• Outdoor equipment used to service the premises (e.g., lawnmowers, snowblowers) if owned by the named insured and not covered elsewhere.

Adjuster Note: Coverage A does not cover land, including the land on which the dwelling is situated.

Coverage B – Other Structures

Coverage B protects detached structures on the residence premises separated from the main dwelling by clear space or connected only by a fence, utility wire, or exterior walkway. Common examples include detached two-car garages, storage sheds, gazebos, swimming pools, and boundary fences.

• Limit of Liability: The standard limit for Coverage B is 10% of Coverage A.
• Key Policy Difference (DP-1 vs. DP-2/DP-3): In the DP-1 Basic Form, the 10% Coverage B limit is an internal limit included within the total Coverage A policy limit—it does not provide additional insurance. If a total fire destroys both the dwelling and detached garage, the maximum payout across both cannot exceed Coverage A. In DP-2 Broad and DP-3 Special, Coverage B provides an additional 10% of insurance above and beyond the Coverage A limit.
• Exclusions: Coverage B excludes structures rented or held for rental to anyone other than a tenant of the dwelling (unless rented solely as a private garage), structures used in whole or in part for commercial, manufacturing, or farming purposes, and structures used to store commercial business property.

Coverage C – Personal Property

Coverage C protects personal and household property usual to the occupancy of a residential dwelling, owned or used by the named insured and resident family members. At the insured's request, it may also cover guest or servant property while on the premises.

• Selection: Coverage C is optional in dwelling policies. A landlord insuring a rental property typically selects a minimal limit or zero Coverage C, whereas a tenant purchasing a contents policy selects a robust Coverage C limit.
• Worldwide Extension: Up to 10% of the Coverage C limit can be applied to covered personal property anywhere in the world (e.g., luggage while traveling). Under DP-1, this extension reduces the remaining Coverage C limit; under DP-2 and DP-3, it acts as an additional amount of insurance.
• Property Excluded: Accounts, bank notes, currency, coins, deeds, evidence of debt, securities; animals, birds, and fish; aircraft and motor vehicles (other than equipment used exclusively to service the premises or motorized wheelchairs for individuals with disabilities); watercraft (other than rowboats and canoes); data and books of account.

Coverage D – Fair Rental Value

Coverage D provides indirect loss protection if a covered peril renders the rented portion of the dwelling uninhabitable. The insurer reimburses the owner for the Fair Rental Value of the leased space, minus any non-continuing operating expenses (such as tenant-paid utilities or discontinued trash services).

• Payment Limitations: In the current ISO DP-1 (2002 and later editions), the insured may use up to 20% of the Coverage A limit for fair rental value, payable at no more than 1/12 of that 20% for each month the rented part is unfit for use. Under DP-1, this payment reduces the Coverage A limit for the same loss; it is not additional insurance. (The older 1988 forms used 10%.)
• DP-2 and DP-3 Treatment: Coverages D and E share up to 20% of the Coverage A limit as additional insurance, payable for the shortest time required to repair or replace the damaged premises.

Coverage E – Additional Living Expense

Coverage E reimburses the insured household for necessary increases in living costs incurred to maintain their normal standard of living following a covered loss that makes the residence uninhabitable. Covered expenses include hotel lodging, restaurant dining, laundry fees, and pet boarding.

• Availability: Coverage E is included automatically only in DP-2 Broad and DP-3 Special forms (sharing the 20% of Coverage A additional limit with Coverage D). Coverage E is not included in DP-1 Basic, though it may be added by endorsement if the owner occupies the premises.
• Condition: Coverage E applies only to owner-occupants or tenant-occupants who actually reside in the dwelling.

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Perils Insured Against: DP-1, DP-2, and DP-3

Claims adjusters must evaluate the exact peril framework of each dwelling form when determining whether a loss falls within the insuring agreement.

+-------------------------------------------------------------------------+
|                    DWELLING PERIL PROGRESSION                           |
+-------------------------------------------------------------------------+
| DP-1 Basic:   Fire + Lightning + Internal Explosion                     |
|      [Optional: Extended Coverage (WHARVES + volcanic) + VMM]           |
| DP-2 Broad:   All DP-1 Perils + EC + VMM + Broad Named Perils           |
|               (BIG AFFECT: Water, Falling Objects, Freezing, Collapse)  |
| DP-3 Special: Open Perils on Structures (Coverages A & B)               |
|               Broad Named Perils on Personal Property (Coverage C)      |
+-------------------------------------------------------------------------+

DP-1 Basic Form (Named Perils)

The DP-1 Basic Form is a bare-bones named peril contract. Under the base insuring agreement, it covers only three causes of loss:

1. Fire: Hostile fires only (a fire that escapes its intended confines, such as a woodstove spark igniting a rug).
2. Lightning: Direct atmospheric electrical discharges.
3. Internal Explosion: Explosions originating within the dwelling or other structure, or within equipment located inside (such as a water heater, boiler, or furnace explosion). It excludes steam boiler explosions owned or operated by the insured.

Extended Coverage (EC) Endorsement

Policyholders can add Extended Coverage (EC) perils for an additional premium. Students often memorize them with the acronym WHARVES, and current ISO dwelling forms add volcanic eruption:

• W - Windstorm: Direct wind force. Excludes interior damage from rain, snow, sand, or dust unless the wind first creates an opening in the roof or exterior walls.
• H - Hail: Exterior damage caused by hailstones.
• A - Aircraft: Direct physical contact with aircraft or falling objects from aircraft.
• R - Riot or Civil Commotion: Physical damage during unlawful assemblies.
• V - Vehicles: Physical contact by a vehicle. Excludes damage caused by vehicles owned or operated by the insured or a tenant.
• E - Explosion: Replaces internal explosion with broad explosion, covering external explosions.
• S - Smoke: Sudden and accidental smoke damage. Excludes agricultural smudging or industrial operations.
• Volcanic eruption: Direct loss from a volcanic eruption (such as airborne blast, ash or lava), but not earthquake, land shock waves or tremors. Eruptions within a 72-hour period count as one eruption. This peril matters on Hawaiʻi Island.

Vandalism & Malicious Mischief (VMM)

VMM may be added only if Extended Coverage is also purchased. VMM covers willful and malicious physical destruction of property.

• The Vacancy Rule: VMM coverage is suspended and completely excluded if the dwelling has been vacant for more than 60 consecutive days immediately preceding the loss. Under insurance definitions, a building is vacant if it lacks sufficient furnishings and occupants for human habitation. An unoccupied dwelling (furnished, but occupants temporarily absent on vacation) retains VMM coverage.

DP-2 Broad Form (Named Perils)

The DP-2 Broad Form is an intermediate named perils contract. It includes all DP-1 perils, Extended Coverage perils, VMM, plus an expanded list of broad perils often remembered by the acronym BIG AFFECT:

• B - Burglary Damage: Damage to the building caused by burglars entering or exiting (does not cover stolen property unless endorsed).
• I - Ice, Sleet, or Snow Weight: Damage to the roof or structure caused by the heavy weight of ice, snow, or sleet. Excludes outdoor property, fences, piers, wharves, and retaining walls.
• G - Glass Breakage: Breakage of glass that forms part of a building (excluded if vacant for more than 60 days).
• A - Accidental Discharge or Overflow of Water or Steam: Sudden discharge from a plumbing, heating, air conditioning, or fire sprinkler system. Excludes continuous or repeated seepage over weeks/months, sumps, backing up of sewers/drains, and the cost to repair the appliance or pipe that leaked.
• F - Freezing of Plumbing: Freezing of plumbing, heating, or AC systems. Condition: The insured must have used reasonable care to maintain heat in the building or completely shut off and drained the water system.
• F - Falling Objects: Damage from falling trees, limbs, or meteorites. The interior of the structure and contents are covered only if the falling object first breaches the exterior roof or walls.
• E - Electrical Damage Artificially Generated: Sudden and accidental damage to appliances, fixtures, or wiring from power surges. Excludes computer tubes, transistors, or electronic circuit boards.
• C - Collapse: Abrupt falling down or caving in of a building or part of a building caused by specified perils, hidden decay, hidden insect damage, or weight of people/rain.
• T - Tearing Apart, Cracking, Burning, or Bulging: Sudden and accidental tearing apart of a steam or hot water heating system, air conditioning system, or water heater.

DP-3 Special Form (Open Perils / Named Perils Hybrid)

The DP-3 Special Form provides the broadest coverage in the dwelling line. It is structured as a hybrid policy:

• Coverages A and B (Structures): Insured on an Open Perils basis (formerly called "all-risk"). The policy covers all direct physical loss to the dwelling and other structures except those perils expressly excluded by the policy.
• Coverage C (Personal Property): Insured on a Named Perils basis. The covered perils for contents are identical to the broad form perils listed under the DP-2 form.

Adjuster Burden of Proof

In an open perils claim under DP-3 (Coverages A and B), the insured only needs to prove that direct physical damage occurred during the policy term. The legal burden of proof rests entirely on the insurer to demonstrate that the loss was caused by an excluded peril. Conversely, under named perils (DP-1, DP-2, or Coverage C on DP-3), the burden rests on the policyholder to prove that a specifically named peril caused the loss.

Key DP-3 Structure Exclusions

Adjusters must verify that none of the following open perils exclusions apply to Coverages A and B:

• Wear and tear, marring, and gradual deterioration
• Rust, corrosion, wet or dry rot, mold, or mildew
• Settling, shrinking, bulging, or expansion of pavements, foundations, walls, or roofs
• Birds, vermin, rodents, insects, or domestic animals
• Industrial smoke, agricultural smudging, or pollution discharge
• Freezing, thawing, or pressure of water or ice on fences, pavements, patios, swimming pools, or footings
• Continuous or repeated seepage of water over a period of weeks, months, or years
• Theft of property not part of a covered building (unattached personal property theft is excluded without the Broad Theft endorsement)
• Vandalism or glass breakage if the dwelling has been vacant for more than 60 consecutive days

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Loss Settlement and Valuation Rules

How a claims adjuster calculates and indemnifies a loss varies fundamentally across the dwelling policy forms.

Note: Replacement Cost on DP-2 and DP-3 applies only if the building is insured to at least 80% of its full replacement cost at the time of loss.

Building Valuation Mechanics

1. DP-1 Valuation: Settle all structural losses at Actual Cash Value (ACV), defined as replacement cost minus depreciation for physical wear, age, and obsolescence. If a roof with a 20-year lifespan is destroyed at year 15, the adjuster deducts 75% depreciation from the current cost of materials and labor.
2. DP-2 and DP-3 Valuation: Provide Replacement Cost (RC) coverage on buildings with no deduction for depreciation, subject to the 80% Coinsurance Rule:
   • Requirement Met: If the amount of insurance carried on the building equals or exceeds 80% of the building's full replacement cost immediately prior to the loss, the insurer pays the full replacement cost of the repair or rebuild (up to policy limits).
   • Requirement Not Met: If the insurance carried is less than 80% of full replacement cost, the insurer pays the larger of two amounts: (1) the Actual Cash Value of the damaged portion, or (2) the proportion calculated by the coinsurance formula: $(\text{Insurance Carried} / [\text{Replacement Cost} \times 80\%]) \times \text{Loss}$.
3. Contents Valuation: On all three forms (DP-1, DP-2, and DP-3), Coverage C personal property is settled strictly on an Actual Cash Value basis. Policyholders seeking replacement cost on contents must add the Personal Property Replacement Cost Loss Settlement endorsement.