Introduction to Dwelling Policies
In the world of property insurance, specifically for those preparing via the complete CAT Adjuster exam guide, understanding the distinction between Homeowners (HO) policies and Dwelling Policy (DP) forms is critical. While HO policies are designed for owner-occupied primary residences, Dwelling Policies are often used for rental properties, seasonal homes, or properties that do not qualify for a standard homeowners form due to age or condition.
For a catastrophe adjuster, identifying whether a policy is a DP-1, DP-2, or DP-3 is the first step in determining coverage for a loss. These forms range from the most restrictive (DP-1) to the most comprehensive (DP-3). The differences primarily lie in the perils insured against and the valuation methods applied to the structure and personal property.
Core Comparison: DP-1 vs. DP-2 vs. DP-3
| Feature | DP-1 (Basic) | DP-2 (Broad) | DP-3 (Special) |
|---|---|---|---|
| Perils Coverage | Named Perils (Very Limited) | Named Perils (Expanded) | Open Peril (Dwelling) / Named (Contents) |
| Settlement (Dwelling) | Actual Cash Value (ACV) | Replacement Cost Value (RCV) | Replacement Cost Value (RCV) |
| Settlement (Contents) | Actual Cash Value (ACV) | Actual Cash Value (ACV) | Actual Cash Value (ACV) |
| Vandalism | Optional Endorsement | Included | Included |
DP-1: The Basic Form
The DP-1 Basic Form is the most restrictive dwelling policy. It is a named peril policy, meaning only the perils specifically listed in the contract are covered. If a peril isn't named, it isn't covered.
Standard DP-1 policies typically cover only three perils:
- Fire
- Lightning
- Internal Explosion
However, many policyholders add the Extended Coverage (EC) endorsement and Vandalism or Malicious Mischief (VMM). EC perils include Windstorm, Hail, Aircraft, Riot/Civil Commotion, Vehicles, Explosion, and Smoke (W.H.A.R.V.E.S.).
Key Adjuster Note: Losses under a DP-1 are almost always settled on an Actual Cash Value (ACV) basis, which accounts for depreciation. This is a common topic on practice CAT Adjuster questions.
DP-2: The Broad Form
The DP-2 Broad Form is also a named peril policy, but it includes everything in the DP-1 plus several additional "broad" perils. Unlike the DP-1, the DP-2 settles dwelling losses on a Replacement Cost Value (RCV) basis, provided the 80% coinsurance requirement is met.
Additional perils covered under DP-2 include:
- Falling Objects: Damage to the exterior first is usually required.
- Weight of Ice, Snow, or Sleet: Coverage for the structure and property inside.
- Accidental Discharge: Water or steam from within plumbing or HVAC systems.
- Freezing: Of plumbing or heating systems (if heat was maintained).
- Sudden Accidental Damage: From artificially generated electrical current.
- Burglary Damage: Damage to the structure caused by burglars (not the theft of items themselves).
DP-3: The Special Form
The DP-3 Special Form is the most popular form for rental properties and the most common "complex" form adjusters encounter. It features a "hybrid" approach to perils:
- Coverage A (Dwelling) & Coverage B (Other Structures): These are covered on an Open Peril basis. This means everything is covered unless it is specifically excluded (such as wear and tear, flood, or earthquake).
- Coverage C (Personal Property): This is covered on a Named Peril basis, typically matching the broad perils found in the DP-2.
Like the DP-2, the DP-3 provides Replacement Cost Value (RCV) for the dwelling and other structures, while personal property is settled at Actual Cash Value (ACV).
Adjuster Tip: Theft Coverage
It is important to note that standard Dwelling Policies (DP-1, DP-2, and DP-3) do not include coverage for the theft of personal property as a standard peril. To cover theft, a policyholder must usually purchase a Theft Coverage Endorsement. This is a frequent trick question on licensing exams!