The Difference Between DP1, DP2, and DP3 Policies
There are two other types of dwelling fire policies—DP2 and DP3 policies.
Like a DP1 policy, a DP2 policy is also a named-perils policy, but the list of covered perils is longer than for a DP1.
A DP3 policy is an open perils policy, which means they insure against all perils except those specifically excluded in the policy. They’re usually more expensive than a DP1 or DP2 policy, but they cover you against more incidents.
Another key difference between the two policies is the way they pay for the damages to your property. DP1 policies are typically actual cash value (ACV) policies. Because the older your vacant home is, the less it is worth, the insurance company will factor depreciation into the amount you’re awarded after a claim.
DP2 and DP3 policies are typically replacement cost insurance, which means the insurance company won’t deduct depreciation from the amount of damages you’re awarded.
DP Policies: Reimbursement in Practice
What does this mean in practice? Imagine that a storm with high winds badly damages the roof on your vacant home or rental property, and you have to replace it. If you have a DP1 policy, the insurance company will consider how old your roof is before deciding how much to give you to replace it. It may cost you $10,000 to repair the roof, but you may only receive $5,000 from the insurance company because the roof is so old that the materials used in it have depreciated.
However, if you have a DP2 or DP3 policy, you’re more likely to receive the $10,000 that it costs to replace the roof because they’re not deducting depreciation from your award amount. You’d only be stuck paying the deductible you agreed to pay.
DP1 policies are usually the cheapest option on the market for rental homes and non-owner-occupied structures. This is partially because they don’t cover as much as the other options. DP3 policies are usually the most expensive, but they also cover more.
When shopping for insurance for a property you don’t live in, it’s best to look at all the factors that can impact which choice is best for you. These include the price, which perils are covered, and the type of insurance (actual cash value vs. replacement cost).