3.1 Dwelling Property Policies (DP-1, DP-2, DP-3)

3.1 Dwelling Property Policies (DP-1, DP-2, DP-3)

The Dwelling Property Program, developed by the Insurance Services Office (ISO), provides tailored property coverage for residential structures that do not qualify for or do not need a comprehensive Homeowners package policy. For property claims adjusters, dwelling policies represent a substantial segment of residential claims, particularly across tenant-occupied rental units, seasonal vacation homes, and properties undergoing rehabilitation.

Unlike Homeowners insurance, which combines property and casualty coverages into a mandatory package and strictly requires owner-occupancy for primary forms, the dwelling policy is first and foremost a monoline property contract. It focuses strictly on physical damage to real and personal property, leaving liability coverage to optional supplemental endorsements.

1. Dwelling Policy Eligibility & Purpose

The fundamental underwriting hallmark of the Dwelling Program is that owner-occupancy is NOT required. A dwelling policy can be written for an absentee landlord renting out a residential structure, an owner who occupies one unit of a multi-family property, or an owner who holds a seasonal cabin or vacant dwelling.

Eligible Properties

• 1- to 4-Family Dwellings: Residential buildings containing up to four distinct family living units.
• Permissible Occupancies: Rental properties occupied by tenants, seasonal or secondary residences, and owner-occupied dwellings that fail to satisfy homeowners underwriting guidelines (such as older homes with low market-to-replacement-cost ratios or adverse loss histories).
• Dwellings Under Construction: Dwellings in the course of construction are eligible when endorsed with the Dwelling Under Construction endorsement.
• Mobile Homes: Permitted under the DP-1 form only if permanently installed on a foundation; in many jurisdictions, mobile homes are endorsed using standard mobile home forms.
• Incidental Business Occupancies: Permitted only if the business is strictly incidental to residential occupancy. The business must be operated solely by the insured or a tenant, involve service rather than sales, and involve no more than two persons working on the premises at any one time (e.g., a private music tutor, tailor, or home office).

Ineligible Properties

• Farms: Any property used for agricultural operations or farming must be insured under a dedicated Farmowners policy.
• Commercial Enterprises: Properties with retail storefronts, manufacturing operations, or business activities with more than two workers are ineligible.

2. Core Coverage Architecture (Coverages A through E)

The ISO Dwelling program organizes physical property protection across five distinct insuring agreements labeled Coverage A through Coverage E.

Detailed Coverage Breakdown for Adjusters

1. Coverage A – Dwelling: Protects the residence premises described in the declarations, including attached structures (e.g., attached carports, breezeways, decks). It also protects outdoor equipment permanently installed on premises to service the dwelling, as well as building materials, alteration supplies, and lumber situated on or adjacent to the premises intended for construction or repair. Coverage A explicitly excludes the land, including the land upon which the dwelling is built.
2. Coverage B – Other Structures: Covers detached structures separated from the primary dwelling by a clear space, or connected solely by a fence, utility line, or exterior walkway. Common examples include detached two-car garages, storage sheds, gazebos, perimeter fences, and in-ground swimming pools. Coverage B explicitly excludes structures rented or held for rental to any person other than a tenant of the dwelling (unless rented solely as a private garage), as well as any structures used in whole or in part for commercial, manufacturing, or farming purposes.
   • Adjuster Distinction (DP-1 vs. DP-2/DP-3): In the DP-1 Basic Form, Coverage B is an extension of Coverage A, not an additional amount of insurance. If a $100,000 DP-1 dwelling burns completely and the detached garage also burns, the total available payout for both cannot exceed $100,000. In contrast, under the DP-2 and DP-3 forms, Coverage B provides an additional 10% amount of insurance ($10,000 over and above the $100,000 Coverage A limit).
3. Coverage C – Personal Property: Insures personal property usual to the occupancy as a dwelling, owned or used by the named insured and residing family members. Because many dwelling policies are written for absentee landlords, Coverage C is entirely optional; landlords often select an endorsement or nominal limit (e.g., $5,000) to cover landlord-owned appliances (refrigerators, stoves, washers, dryers) and maintenance tools left on site. The policy allows up to 10% of the Coverage C limit to apply to covered personal property worldwide while temporarily away from the premises. Excluded property includes motor vehicles, watercraft (other than rowboats and canoes), animals/birds/fish, accounts, bills, currency, deeds, and tenant-owned property.
4. Coverage D – Fair Rental Value: Provides indirect loss indemnification to the property owner when a covered direct physical loss renders the rented premises unfit for normal habitation. The insurer reimburses the fair rental value of the rented portion, less any operational charges and expenses that do not continue while the property is unoccupied (such as utilities paid by the landlord). In the DP-1, Coverage D is limited to 10% of Coverage A (payable at a maximum rate of 1/12th per month) and is an extension of Coverage A (not additional insurance). In the DP-2 and DP-3, Coverage D is up to 20% of Coverage A and is an additional amount of insurance.
5. Coverage E – Additional Living Expense (ALE): Reimburses the necessary increase in living expenses incurred by the resident household to maintain its normal standard of living when a covered loss renders the dwelling uninhabitable. Coverage E is available only if the insured is an owner-occupant or resident tenant. Crucially, Coverage E is NOT included in the base DP-1 Basic Form; it must be added by specific endorsement. In the DP-2 and DP-3 forms, Coverage E is automatically included up to 10% of Coverage A as an additional amount of insurance.

3. Analysis of Dwelling Policy Forms: DP-1, DP-2, and DP-3

The primary difference across the three dwelling policy forms lies in the causes of loss (perils) insured against and the valuation methodology applied to structural damage.

   +-------------------------------------------------------------------------+
   |                       THE DWELLING PERIL CONTINUUM                      |
   +-------------------------------------------------------------------------+
   |  DP-1 Basic Form        |  DP-2 Broad Form        |  DP-3 Special Form  |
   |  (Named Perils)         |  (Named Perils)         |  (Open / Named)     |
   |  - Fire                 |  - All DP-1 Perils      |  - Buildings:       |
   |  - Lightning            |  - Falling Objects      |    OPEN PERILS      |
   |  - Internal Explosion   |  - Weight of Ice/Snow   |    ("All-Risk")     |
   |  [+ EC Endorsement]     |  - Water Discharge      |  - Contents:        |
   |  [+ VMM Endorsement]    |  - Freezing of Pipes    |    Broad Named      |
   |  Settlement: ACV        |  Settlement: RC (80%)   |  Settlement: RC(80%)|
   +-------------------------------------------------------------------------+

DP-1: Basic Form (DP 00 01)

The DP-1 is a strictly named-peril policy that indemnifies covered physical losses exclusively on an Actual Cash Value (ACV) basis (Replacement Cost minus depreciation) for both real and personal property.

• Inception Base Perils: Out of the box, the unendorsed DP-1 covers only three direct perils:
  1. Fire (hostile fire only; friendly fires confined to their intended hearth or furnace are excluded);
  2. Lightning (direct atmospheric electrical discharge);
  3. Internal Explosion (an explosion occurring within the dwelling or other structure, such as a water heater or furnace rupture; external explosions are excluded).
• Extended Coverage (EC) Endorsement: By paying an additional premium, the insured adds the Extended Coverage perils, remembered by the classic acronym W.C. SHAVLER or REV. C. SHULER:
  • Windstorm
  • Civil commotion
  • Smoke (sudden and accidental smoke; agricultural smudging and fireplace smoke are excluded)
  • Hail
  • Aircraft (direct physical contact by aircraft or falling aircraft parts)
  • Vehicles (physical contact by vehicles; excludes damage caused by vehicles owned or operated by an occupant, and excludes damage to fences, driveways, or walks)
  • Volcanic eruption (airborne shockwaves, ash, dust, and lava flow; excludes earthquake, tremors, or land shockwaves)
  • Explosion (expands internal explosion to include external explosions off-premises)
  • Riot
• Vandalism & Malicious Mischief (VMM) Endorsement: VMM can be purchased only in conjunction with the EC endorsement. VMM covers willful and malicious physical destruction of property. Critical Adjuster Rule: VMM coverage is completely suspended if the dwelling has been vacant for more than 60 consecutive days immediately preceding the loss. A dwelling is considered vacant when it contains neither human occupants nor sufficient furnishings to enable habitation. (An unoccupied home—furnished but temporarily absent of occupants—is not vacant).

DP-2: Broad Form (DP 00 02)

The DP-2 is an expanded named-peril contract that includes all basic DP-1 perils, the Extended Coverage perils, VMM, and seven additional broad causes of loss:

1. Falling Objects: Direct physical damage from falling trees, limbs, or meteorites. The falling object must first breach the exterior roof or walls before interior contents become covered.
2. Weight of Ice, Snow, or Sleet: Structural collapse or physical damage caused by the physical weight of accumulated winter precipitation.
3. Accidental Discharge or Overflow of Water or Steam: Discharge from within an automatic fire sprinkler, plumbing, heating, or air conditioning system. Crucially, the policy covers the resulting water damage and the tearing out of building walls/floors to access the leak, but excludes repair or replacement of the defective appliance or pipe that ruptured.
4. Sudden and Accidental Tearing Apart, Cracking, Burning, or Bulging: Applies to steam or hot water heating systems, air conditioning units, or automatic fire sprinkler systems.
5. Freezing of Plumbing, Heating, Air Conditioning, or Sprinkler Systems: Covered only if the insured exercised reasonable care to maintain heat in the building, or completely shut off the main water supply and drained all systems and appliances.
6. Sudden and Accidental Damage from Artificially Generated Electrical Current: Sudden burnouts of electrical wiring or circuits caused by power surges; excludes electronic components, computer motherboards, tubes, and transistors.
7. Volcanic Eruption: Covers direct physical damage caused by the blast, lava, and ashfall from volcanic activity.

Loss Valuation: The DP-2 introduces Replacement Cost loss settlement for building structures (Coverages A & B) without deduction for depreciation, provided the insured maintains coverage equal to at least 80% of the full replacement cost of the structure at the time of loss (the coinsurance condition). Personal property (Coverage C) is settled on an ACV basis.

DP-3: Special Form (DP 00 03)

The DP-3 represents the premier coverage form within the Dwelling Property Program, employing a hybrid perils architecture:

• Coverages A and B (Dwelling and Other Structures): OPEN PERILS ("All-Risk"). The policy covers all direct physical loss to real property structures except those perils expressly excluded by the policy text.
• Coverage C (Personal Property): NAMED BROAD PERILS. Personal property is insured against the same broad perils enumerated under the DP-2 form.

Claims Adjuster Burden of Proof Comparison

Understanding the evidentiary burden is vital when evaluating dwelling claims in Texas:

4. Master Comparison Matrix: DP-1 vs. DP-2 vs. DP-3

The following matrix summarizes the essential underwriting and loss adjustment distinctions across all three ISO Dwelling Property forms:

5. Realistic Adjuster Claim Scenarios

Scenario 1: The Total Fire Loss & Other Structures Allocation

Claim Facts: A landlord owns a rental property insured under an ISO DP-1 Basic Form with Extended Coverage and VMM. The Coverage A limit is $150,000, with a $1,000 deductible. A severe fire destroys the entire dwelling, resulting in a total structural loss with a replacement cost of $165,000 (ACV determined to be $150,000). A detached two-car garage (Coverage B) is also completely consumed, sustaining an ACV loss of $18,000.

Adjuster Analysis:

1. Under the DP-1 Basic Form, Coverage B is an extension of Coverage A, not an additional amount of insurance.
2. The maximum payout under Coverage A and Coverage B combined is capped at the Coverage A policy limit: $150,000.
3. The dwelling loss alone exhausts the entire $150,000 policy limit. After applying the $1,000 deductible against the gross loss, the insurer pays the maximum policy limit of $150,000. There are no additional funds available for the detached garage.

Contrast with DP-2 or DP-3: Had the policy been written on a DP-2 or DP-3 form, Coverage B would have provided an additional 10% of insurance ($15,000 over and above Coverage A). The adjuster would have paid $150,000 for the dwelling and an additional $15,000 for the detached garage, totaling $165,000 (less deductible).

Scenario 2: Unoccupied Winter Freeze vs. Vacancy

Claim Facts: An insured owns a mountain cabin in Texas hill country insured under a DP-2 Broad Form. The insured shuts down the cabin for the winter in November. In January, an extreme arctic freeze hits the area. A copper pipe bursts, flooding the interior and causing $22,000 in drywall and flooring damage. The adjuster inspects the property and discovers that the insured turned off the thermostat completely to save electric bills and did not drain the plumbing pipes or shut off the main water supply valve.

Adjuster Analysis:

1. The DP-2 covers freezing of plumbing systems under the Broad perils, but includes a mandatory condition: the insured must have used reasonable care to maintain heat in the building, OR shut off the water supply and drained the system.
2. Because the insured failed both prongs of the condition (heat was turned off and water was left charged in the pipes), the freeze damage is expressly excluded.
3. The adjuster must issue a formal denial based on the policy condition. If the insured had maintained heat at 55 degrees or drained the lines, the ensuing water damage would have been covered in full.