7.1 Dwelling Policy Forms (DP-1, DP-2, DP-3)

7.1 Dwelling Policy Forms (DP-1, DP-2, DP-3)

In property insurance claims adjustment, understanding the Dwelling Property Program developed by the Insurance Services Office (ISO) is essential. Unlike Homeowners policies—which package property and personal liability coverages together and require owner-occupancy for primary forms—the ISO Dwelling Policy program is a monoline property contract designed for residential properties that do not meet standard Homeowners eligibility criteria.

Adjusters licensed in North Carolina frequently handle claims on rental properties, vacation homes, and older residential structures insured under dwelling policy forms. Mastering the differences among the DP-1 Basic Form, DP-2 Broad Form, and DP-3 Special Form is a core requirement for the North Carolina Claims Adjuster Licensing Examination.

1. Eligibility Criteria for the Dwelling Program

The Dwelling Property Program accommodates residential structures that are ineligible for standard Homeowners (HO) policies or where the owner seeks property-only protection without bundled liability insurance.

┌─────────────────────────────────────────────────────────────────────────────┐
│                     ISO DWELLING PROGRAM ELIGIBILITY                        │
├─────────────────────────────────────────────────────────────────────────────┤
│  PERMITTED RISKS:                                                           │
│  • 1 to 4 Family Private Residential Dwellings                             │
│  • Tenant-Occupied Rental Properties (Landlord Policies)                    │
│  • Seasonal, Vacation, or Secondary Dwellings                               │
│  • Owner-Occupied Dwellings not qualifying for Homeowners (e.g., low value) │
│  • Dwellings Under Construction (via Builder's Risk Endorsement)            │
│  • Incidental Service Businesses (max 2 employees/assistants on premises)   │
├─────────────────────────────────────────────────────────────────────────────┤
│  INELIGIBLE RISKS:                                                          │
│  • Mobile Homes or Trailers (unless endorsed with Mobile Home Endorsement)  │
│  • Farm Property or Commercial Agricultural Operations (Farm forms apply)   │
│  • Multi-Family Dwellings with 5 or more units (Commercial forms apply)     │
└─────────────────────────────────────────────────────────────────────────────┘

Eligible Properties

1. 1 to 4 Family Dwellings: Single-family homes, duplexes, triplexes, and fourplexes used exclusively for private residential purposes.
2. Occupancy Types: Properties may be owner-occupied or tenant-occupied (rental properties). Dwellings may contain up to 5 roomers or boarders.
3. Seasonal and Vacation Dwellings: Cottages, mountain cabins, and coastal vacation rentals that remain unoccupied for portions of the year.
4. Dwellings Under Construction: New residential construction insured through the Dwelling Under Construction endorsement (DP 17 08).
5. Permitted Incidental Occupancies: Incidental service-oriented businesses are permitted if operated exclusively by the insured or tenant and staffed by no more than 2 employees or assistants at any time. Examples include beauty salons, photography studios, music tutoring studios, tailor shops, and professional home offices. Retail merchandise sales or manufacturing operations are strictly prohibited.

Ineligible Properties

• Farms and Agricultural Risks: Properties containing farming operations, livestock rearing, or commercial crops must be insured under specialized Farm Property forms.
• Mobile Homes: Mobile or manufactured homes are ineligible under the standard dwelling policy unless modified by a specific Mobile Home endorsement.
• Commercial Residential Risks: Apartment complexes with 5 or more residential dwelling units require ISO Commercial Property policies.

2. ISO Dwelling Form 1 — Basic Form (DP 00 01 / DP-1)

The DP-1 Basic Form is the most restrictive dwelling policy. It provides named-peril coverage on an Actual Cash Value (ACV) basis for both real property (dwelling and other structures) and personal property.

1. Base Perils (Inception Perils)

In its standard form without endorsements, the DP-1 covers only three base perils:

1. Fire: Hostile fire only (a fire that burns outside its intended container or becomes uncontrollable). Friendly fires (such as a fire contained within a fireplace or woodstove) are excluded.
2. Lightning: Direct physical damage resulting from atmospheric electrical discharges.
3. Internal Explosion: An explosion occurring inside the dwelling or other covered structure (e.g., a catastrophic furnace or hot water heater tank explosion). It excludes steam boiler ruptures and external explosions occurring off-premises.

2. Extended Coverage (EC) Perils Endorsement

By paying an additional premium, the policyholder can add the Extended Coverage (EC) endorsement. On licensing exams, EC perils are remembered using the classic acronym W.C. SHAVVER:

• W — Windstorm: Direct damage caused by high winds, gale-force gusts, and tornadoes. Interior damage from rain, snow, sand, or dust is covered only if the windstorm first creates an opening in the roof or exterior walls.
• C — Civil Commotion: Damage resulting from riots, strikes, lockouts, or public civil disorders.
• S — Smoke: Sudden and accidental smoke damage. The DP-1 EC endorsement excludes smoke from agricultural smudging, industrial operations, and fireplace soot or smoke.
• H — Hail: Direct physical damage to exterior roofing and siding. Interior damage is covered only if hail breaches exterior walls or roofing.
• A — Aircraft: Physical contact with aircraft, spacecraft, self-propelled missiles, or falling aircraft parts.
• V — Vehicles: Direct physical impact by motor vehicles. Under DP-1, this peril excludes damage caused by vehicles owned or operated by the insured or any resident of the described location, and excludes any vehicle damage to fences, driveways, or walkways.
• V — Volcanic Eruption: Direct damage from volcanic blast, airborne shockwaves, ash, dust, or lava flow. Excludes earthquake, earth tremors, or volcanic land movement.
• E — Explosion: Broadens explosion coverage to include external explosions occurring outside the structure (excluding steam boiler explosions).

3. Vandalism & Malicious Mischief (V&MM) Endorsement

Vandalism & Malicious Mischief (V&MM) can be added only if the Extended Coverage endorsement is also purchased. V&MM covers willful and malicious destruction or defacement of covered property.

Critical Adjuster Exam Rule: V&MM coverage is completely suspended if the dwelling has been vacant for more than 60 consecutive days immediately preceding the loss. In insurance terminology, a building is vacant when it lacks both human occupants and sufficient furnishings for customary habitation. (A dwelling that is unoccupied—meaning fully furnished but temporarily lacking inhabitants—retains V&MM coverage).

4. Loss Settlement Under DP-1

All covered property losses under the DP-1 (Coverages A, B, and C) are settled on an Actual Cash Value (ACV) basis (Replacement Cost New minus physical depreciation).

3. ISO Dwelling Form 2 — Broad Form (DP 00 02 / DP-2)

The DP-2 Broad Form is an intermediate, named-peril policy that automatically incorporates all DP-1 base perils, Extended Coverage perils, Vandalism & Malicious Mischief, plus seven Broad Form perils.

The Broad Form Perils: B.B. B-ICE-RAY

On the North Carolina licensing examination, the Broad Form perils are memorized using the acronym B.B. B-ICE-RAY:

Enhanced Perils in DP-2 vs DP-1

• Smoke Peril: DP-2 broadens smoke coverage to include fireplace smoke and soot, which is strictly excluded under DP-1.
• Vehicle Peril: DP-2 covers damage caused by vehicles driven by the insured, provided the vehicle does not strike the insured's own fence, driveway, or walkway.

Loss Settlement Under DP-2

• Coverages A & B (Dwelling and Other Structures): Settled on a Replacement Cost (RC) basis without deduction for depreciation, provided the insured maintains coverage equal to at least 80% of the full replacement value of the structure at the time of loss.
• Coverage C (Personal Property): Settled on an Actual Cash Value (ACV) basis.

4. ISO Dwelling Form 3 — Special Form (DP 00 03 / DP-3)

The DP-3 Special Form is the most comprehensive dwelling policy. It utilizes a hybrid peril structure:

1. Coverages A & B (Dwelling & Other Structures): Open Perils ("All-Risk"). The policy covers all direct physical losses to real property except those perils that are specifically and expressly excluded in the policy contract.
2. Coverage C (Personal Property): Named Broad Form Perils. Personal property is covered against the exact same named perils as the DP-2 Broad Form (B.B. B-ICE-RAY).

Open Perils Exclusions on Coverages A & B

Because Coverages A and B are written on an open-peril basis, coverage applies automatically unless an exclusion applies. Major exclusions on structures under DP-3 include:

• Wear and tear, marring, deterioration, and inherent vice
• Mold, dry rot, wet rot, and rust (unless resulting from accidental water discharge)
• Smog, smoke from agricultural smudging or industrial operations
• Mechanical breakdown, latent defect, and electrical breakdown
• Settling, shrinking, bulging, or expansion of foundations, walls, floors, or pavements
• Birds, vermin, rodents, insects, or nesting animals
• Freezing of plumbing, heating, or AC systems while the dwelling is vacant or unoccupied, unless the insured exercised reasonable care to maintain heat in the building or shut off and drained the water supply
• Theft of building materials from a dwelling under construction before it is completed and occupied
• Continuous or repeated seepage or leakage of water over a period of weeks, months, or years
• Vandalism and malicious mischief if the dwelling has been vacant for more than 60 consecutive days

Legal Burden of Proof: Open Perils vs Named Perils

A fundamental principle tested on the North Carolina adjuster licensing exam concerns the legal burden of proof during claims adjustment:

┌─────────────────────────────────────────────────────────────────────────────┐
│                     LEGAL BURDEN OF PROOF COMPARISON                        │
├──────────────────────────┬──────────────────────────────────────────────────┤
│  NAMED PERILS            │  The INSURED must prove that the direct physical │
│  (DP-1, DP-2, DP-3 Cov C)│  loss was caused by a specific listed peril.     │
├──────────────────────────┼──────────────────────────────────────────────────┤
│  OPEN PERILS             │  The INSURED proves direct physical damage;      │
│  (DP-3 Cov A & Cov B)    │  The INSURER must prove that an exclusion applies│
│                          │  to deny coverage.                               │
└──────────────────────────┴──────────────────────────────────────────────────┘

Loss Settlement Under DP-3

• Coverages A & B (Dwelling and Other Structures): Settled on a Replacement Cost (RC) basis, subject to the standard 80% coinsurance condition.
• Coverage C (Personal Property): Settled on an Actual Cash Value (ACV) basis.

5. Comprehensive Comparison Matrix: ISO Dwelling Forms

The following comparative table summarizes the critical structural and technical differences among the three ISO dwelling forms:

6. Practical Claims Adjuster Case Study

Claims Scenario: A polar vortex brings sub-freezing temperatures to an unoccupied rental property in Asheville, North Carolina. The property is owned by a landlord and insured under a standard DP-2 Broad Form with Coverage A = $250,000, Coverage C = $30,000, an 80% coinsurance clause, and a $1,000 deductible.

While between tenants in January, the landlord maintained the central thermostat at 65°F. However, an extreme cold snap causes an interior copper water pipe inside an exterior bathroom wall to freeze and burst. Escaping water floods the hardwood floors, ruins the drywall, and destroys landlord-owned appliances and furnishings valued at $12,000 RCN (Effective age 4 years, expected life 10 years, 40% depreciation = $4,800). The total cost to tear out the walls, replace the burst copper pipe fitting ($450), and rebuild the hardwood floors and drywall is $38,000.

Adjuster's Step-by-Step Loss Adjustment:

1. Peril Analysis: The loss was caused by freezing of a plumbing system and accidental discharge of water. Under DP-2, freezing is covered because the landlord exercised reasonable care by maintaining heat (thermostat set to 65°F).
2. Tear-Out vs Pipe Repair:
   • The cost to tear out and replace damaged drywall and subflooring to access and repair the plumbing is covered under the water discharge peril.
   • The $450 cost to repair the plumbing pipe itself is EXCLUDED under the policy terms (the policy covers resulting water damage and tear-out, not repair of the failed appliance or pipe).
   • Covered structure damage: $$38,000 - $450 = $37,550$.
3. Structure Settlement (Coverage A):
   • The landlord satisfied the 80% coinsurance requirement.
   • Coverage A pays Replacement Cost: $37,550.
4. Personal Property Settlement (Coverage C):
   • Under DP-2, Coverage C is settled on an Actual Cash Value (ACV) basis.
   • $\text{ACV} = \text{RCN ($12,000)} - \text{Depreciation ($4,800)} = $7,200$.
5. Net Claim Payout Calculation:
   • $\text{Gross Covered Loss} = $37,550 \text{ (Structure RC)} + $7,200 \text{ (Contents ACV)} = $44,750$.
   • $\text{Less Policy Deductible} = -$1,000$.
   • Total Net Indemnification Paid to Landlord: $43,750.