Page 76 - AAGLA-FEB 2022

Property Management
What Are the Various Types of Rental Property Insurance?
There are three primary types of rental property insurance, also known as dwelling policies (DP) -- DP-1, DP-2, and DP- 3. These offer considerable differences in the circumstances and types of coverage they offer.
DP-1
DP-1 policies are very limited in their coverage and are based only on specific risks or perils named in the policy. These may include damage from the following:
• Fire and Lightning
• Internal and External Explosion
• Windstorm and Hail
• Riot and Civil Commotion
• Smoke
• Aircraft
• Vehicles
• Volcanic Explosion
• Vandalism and Malicious Mischief (may not be
included in all policies)
DP-1 policies are usually based on the actual cash value (ACV) of the various components of the dwelling. While the dwelling itself may appreciate in value over time, the components may depreciate. For example, a roof that was replaced 10 years ago is worth less than a roof that was replaced one year ago, even if the rest of the dwelling is worth far more than it was worth 10 years ago. A DP-1 policy will only reimburse the property owner for the ACV or depreciated value of the element being claimed.
DP-2
DP-2 policies offer an average amount of protection along with coverage for many more risks than those covered by a DP-1 policy. These may include the following:
• Fire and Lightning
• Internal and External Explosion
• Windstorm and Hail
• Riot and Civil Commotion
• Smoke
• Aircraft
• Vehicles
• Volcanic Explosion
• Vandalism and Malicious Mischief
• Burglary Damage
• Weight of Ice and Snow
• Glass Breakage
• Accidental Discharge or Overflow of Water or
Steam
• Falling Objects
• Freezing of Pipes
• Electrical Damage
• Collapse
• Tearing Apart, Cracking, Burning, Bulging
Generally, DP-2 coverage is replacement cost insurance,
which can offer a significant advantage over DP-1 actual cash value coverage. That means that in the event of a claim, the policy would pay to replace the damaged element without regard for its depreciation. In addition, DP-2 policies generally offer loss of rental income coverage. Overall, DP-2 coverage provides a significant advantage over DP-1 coverage and should be considered by the property owner if at all financially possible.
DP-3
In contrast to DP-1 and DP-2 policies, DP-3 policies cover all perils except those that are specifically excluded by the policy. These may include:
• Ordinance or Law
• Earth Movement
• Water Damage (may be included in some policies)
• Mold (may be included in some policies)
• Power Failure
• Neglect
• War
• Nuclear Hazard
• Intentional Loss
• Governmental Action
DP-3 insurance policies may cover personal property but will cover far less than homeowner’s insurance would since most of the personal property will be that of the tenants. In most cases, personal property coverage will be limited to the appliances and not much else. Check with the insurance carrier to determine whether policy limits on personal property are sufficient to replace personal property that is damaged or destroyed during a covered event.
One additional advantage of DP-3 coverage over the other categories is that it may offer some coverage during times when the property is unoccupied. Check with your insurance carrier to find out if you need to adjust coverage in the event that the property is unoccupied for 30 days or more due to a lack of tenants or to facilitate repairs and improvements.
How Much Does Rental Property Insurance Cost?
There is no good average for rental property insurance since premiums can vary widely depending on a number of factors, including the following:
• The market where the rental property is located
• The type of property (single family or multi-family)
• The value of the property
• The type of rental plan (short-term, long-term,
seasonal)
• Additional structures and features including pool,
storage building, retaining walls or fences
• The type of policy chosen (DP-1, DP-2, or DP-3)
• Add-on coverage for floods, earthquakes, or other
specialty coverage
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