5.3 Dwelling Policy Program (DP-1, DP-2, DP-3), Other Structures & Fair Rental Value

Dwelling Policy Program (DP-1, DP-2, DP-3), Other Structures & Fair Rental Value

Exam Focus: The Series 17-70 exam tests the operational boundaries of the Dwelling Program, especially the differences between DP-1, DP-2, and DP-3; how Coverage B operates as an extension of Coverage A in DP-1 versus an additional limit in DP-2 and DP-3; the 1/12th monthly limitation on Fair Rental Value under DP-1; and the critical fact that DP-1 excludes Coverage E (Additional Living Expense).

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Purpose and Underwriting Eligibility of the Dwelling Program

The ISO Dwelling Property Program provides property insurance for residential structures that do not meet the underwriting eligibility requirements of the Homeowners Program. While homeowners policies package property and liability coverage exclusively for owner-occupied dwellings, the dwelling program is primarily designed for:

• Tenant-Occupied Rental Properties: Residential dwellings rented to others where the owner does not reside on the premises (landlord policies).
• Vacant or Unoccupied Dwellings: Properties transitioning between owners or undergoing probate.
• Seasonal and Vacation Homes: Dwellings occupied only during specific seasons.
• Sub-Standard or Non-Conforming Dwellings: Older homes, properties in high-risk physical locations, or dwellings whose low market value fails to meet minimum homeowners coverage thresholds.
• Dwellings Under Construction: New residential structures before occupancy.
• Incidental Business Occupancies: Permitted only if service-oriented, operated by the owner-occupant or tenant, and employing no more than two persons (e.g., small music studio, barber shop, or tutoring office).

Foundational Distinction: Property vs. Liability

Unlike a Homeowners policy, a standard Dwelling policy is monoline property insurance. It does not automatically include personal liability coverage (Coverage L) or medical payments to others (Coverage M). If the property owner requires liability protection, it must be added by attaching the Personal Liability Endorsement (DL 24 01) or purchased via a standalone Comprehensive Personal Liability (CPL) policy. Furthermore, theft of personal property is completely excluded unless added by endorsement.

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The Three Dwelling Policy Forms: DP-1, DP-2, and DP-3

The ISO dwelling program is structured around three tiered policy forms offering progressively broader peril coverage and loss settlement terms:

1. DP-1 Basic Form

The DP-1 Basic Form is a restrictive named-peril policy designed for budget, higher-risk, or vacant structures:

• Base Perils: Covers only Fire, Lightning, and Internal Explosion (e.g., an exploding stove or hot water heater inside the dwelling; explosion of a steam boiler or off-premises gas line is not covered).
• Extended Coverage (EC) Endorsement: For an additional premium, the insured can add the WHARVES perils: Windstorm, Hail, Aircraft, Riot/Civil Commotion, Vehicles, Explosion (external and internal), and Smoke (sudden and accidental; excludes fireplace smoke).
• Vandalism or Malicious Mischief (V&MM): Can be added only if the Extended Coverage endorsement is also purchased. V&MM is automatically suspended if the dwelling has been vacant for more than 60 consecutive days prior to the loss.
• Loss Settlement: All covered property losses—both buildings (Coverages A & B) and contents (Coverage C)—are settled strictly on an Actual Cash Value (ACV) basis.

2. DP-2 Broad Form

The DP-2 Broad Form is an expanded named-peril contract:

• Covered Perils: Includes all DP-1 perils, the Extended Coverage perils, V&MM, and the broad perils:
  • Weight of ice, snow, or sleet
  • Falling objects
  • Accidental discharge or overflow of water or steam
  • Freezing of plumbing, heating, or AC systems
  • Sudden and accidental tearing apart, cracking, or bulging of heating/cooling systems
  • Artificially generated electrical damage
• Loss Settlement: Building structures (Coverages A and B) are settled on a Replacement Cost (RC) basis, subject to the standard 80% coinsurance rule. Personal property (Coverage C) remains settled at ACV.

3. DP-3 Special Form

The DP-3 Special Form is the premier dwelling contract offering open-peril protection:

• Covered Perils: Provides open perils (risk of direct physical loss) on the dwelling and other structures (Coverages A and B), and broad named perils on personal property (Coverage C).
• Loss Settlement: Buildings (Coverages A and B) are settled on a Replacement Cost (RC) basis (80% coinsurance condition). Personal property is settled at ACV.

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Core Dwelling Coverages: Coverages A through E

Coverage A – Dwelling

Covers the dwelling building described in the Declarations, attached structures, materials and supplies on or adjacent to the premises for building alteration/repair, and building equipment and outdoor equipment used to service the premises (such as lawnmowers or snowblowers owned by a landlord). Land is excluded.

Coverage B – Other Structures

Covers detached structures on the premises separated from the dwelling by clear space.

• Limit: Standard limit is 10% of Coverage A.
• Crucial Form Difference:
  • In the DP-1, Coverage B is an extension of Coverage A, NOT an additional amount of insurance. If a dwelling has a $100,000 Coverage A limit and suffers a $95,000 dwelling loss plus a $10,000 detached garage loss, the total payout cannot exceed $100,000.
  • In the DP-2 and DP-3, Coverage B is an additional amount of insurance. In the same scenario, the policy would pay $95,000 under Coverage A and the full $10,000 under Coverage B (since up to $10,000 is available as a separate limit).

Coverage C – Personal Property

Covers personal property usual to the occupancy of a dwelling, owned or used by the insured or residing family members.

• Tenant Property: A landlord's policy never covers property belonging to tenants, roomers, or boarders.
• Worldwide Off-Premises Coverage: Up to 10% of Coverage C may be applied to personal property anywhere in the world. In DP-1, this off-premises extension reduces the total Coverage C limit; in DP-2 and DP-3, it is an additional amount of insurance.

Coverage D – Fair Rental Value

Reimburses the insured for lost rental income when a covered peril makes that part of the dwelling rented to others untenantable.

• Standard Limit: Up to 20% of Coverage A.
• DP-1 Monthly Cap: Under the DP-1 form, Fair Rental Value is strictly capped at a maximum of 1/12th of the 20% limit for each month the premises remain vacant and untenantable.
• DP-2 and DP-3: The 1/12th monthly cap does not apply. The policy pays the actual monthly loss for the reasonable time required to repair or rebuild, up to the aggregate 20% limit.

Coverage E – Additional Living Expense (ALE)

Reimburses extra expenses incurred by an owner-occupant to maintain a normal standard of living when a covered loss makes the residence premises uninhabitable.

• Exam Rule: Coverage E is automatically included in the DP-2 and DP-3 forms (combined with Coverage D up to 20% of Coverage A).
• DP-1 Exclusion: Coverage E is NOT included in the DP-1 form and can only be acquired if specifically added by endorsement. Because the DP-1 is commonly used for rental properties where the owner does not reside, ALE is inherently unnecessary unless an owner lives in a DP-1 dwelling.

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Essential Dwelling Policy Endorsements

Because standard dwelling policies provide basic monoline property coverage, adjusters frequently encounter three critical endorsements:

1. Theft Coverage Endorsement:
   • Broad Theft Coverage: Available only to owner-occupants; provides on-premises and off-premises theft protection, including sub-limits on cash, jewelry, and firearms.
   • Limited Theft Coverage: Available to non-owner occupied landlord properties; covers theft on-premises only, with no off-premises coverage and no coverage for tenant theft.
2. Personal Liability Endorsement (DL 24 01): Provides Coverage L (Personal Liability - $100,000 standard) and Coverage M (Medical Payments to Others - $1,000 per person), bringing homeowners-style liability to a dwelling policy.
3. Automatic Increase in Insurance (Inflation Guard): Increases the Coverage A and B limits annually by a designated percentage (4%, 6%, or 8%) to combat inflation.