The DP-1 “Bare Bones” Policy: The Riskiest Way to Insure Your Rental Property.
My Tenant’s Fire Cost Me a Fortune Because of My “Cheap” Policy.
I tried to save a few hundred dollars by insuring my first rental property with a DP-1 policy. It was a disaster. A small kitchen fire caused a lot of smoke damage. The DP-1, being a “named peril” policy, covered the fire, but it did not list “smoke” as a covered peril, so that part of the claim was denied. To make it worse, it only paid the “Actual Cash Value,” giving me a depreciated amount that wasn’t nearly enough to repair the damage. My “cheap” policy ended up being incredibly expensive.
Why a DP-3 is the “Cadillac” of Landlord Policies (And Worth Every Penny).
The “All-Risk” and “Replacement Cost” Superpowers.
After getting burned by a DP-1, I switched all my properties to DP-3 policies. The difference is night and day. A DP-3 is the “Cadillac” because of two superpowers. First, it provides “open peril” or “all-risk” coverage, meaning it covers everything unless it is specifically excluded. Second, it pays claims on a “Replacement Cost” basis, giving me the full amount needed to make repairs with new materials. It is a far superior, more comprehensive policy that is worth every single penny of the extra premium.
DP-1 Pays Actual Cash Value. DP-3 Pays Replacement Cost. This is a HUGE Deal.
The Difference Between Rebuilding and Receiving a Pittance.
This is the single most important financial difference. A DP-1 policy settles claims at Actual Cash Value (ACV). It pays you for what your damaged property was worth a second before the loss, after subtracting years of depreciation. A DP-3 policy settles claims at Replacement Cost Value (RCV). It pays you what it will actually cost to repair or rebuild your property with new materials at today’s prices. One leaves you short; the other makes you whole.
The “Named Peril” Trap of a DP-1: What Happens if a Peril Isn’t on the List?
If It’s Not on the List, It’s Not Covered. Period.
A DP-1 is a “named peril” policy. This means it has a very short, specific list of things it will cover, usually just fire, lightning, and internal explosion. If your rental property is damaged by anything that is not on that specific list—like a burst pipe, the weight of ice, or a falling tree—you have zero coverage. The burden of proof is on you to show that your loss was caused by one of the few covered perils. It is a restrictive and dangerous way to insure an asset.
How a DP-3’s “Open Peril” Coverage Can Save You from Financial Ruin.
It Covers Everything, Unless It’s Specifically Excluded.
A DP-3 policy is an “open peril” or “all-risk” policy. This flips the script entirely. It covers your property for damage from any and every cause, unless that cause is specifically listed as an exclusion in the policy (like flood or earthquake). This provides a massive, broad blanket of protection against freak accidents and bizarre events. With a DP-3, the burden of proof is on the insurance company to show why your loss is not covered.
“My Tenant’s Dog Bit Someone.” Why a DP-1 Offers Zero Liability Protection.
The Most Overlooked Risk of Being a Landlord.
A DP-1 policy is a bare-bones property policy. It typically provides zero personal liability coverage. If your tenant’s guest trips on a broken step and sues you, or if your tenant’s dog bites a neighbor, you have no coverage. A DP-3 policy, on the other hand, includes a robust personal liability component. This is the part of the policy that protects your personal assets from the massive liability risks that come with owning a rental property.
For a Few Dollars More, You Can Get 10x the Protection with a DP-3.
The Best Bargain in Real Estate Investing.
The price difference between a DP-1 and a DP-3 policy for the same property is often surprisingly small. You might only pay an extra 15-25% in premium. But for that small additional cost, you are getting a policy that is exponentially better. You are upgrading from “named peril” to “open peril,” from “Actual Cash Value” to “Replacement Cost,” and you are adding crucial liability protection. It is, without a doubt, the single best and most important investment a landlord can make.
The Landlord Insurance That Only Covers Fire, and the One That Covers Almost Everything.
The Two Extremes of Dwelling Policies.
This is the simple way to think about it. A DP-1 is basically just a fire insurance policy. It covers very little else. A DP-3 is a comprehensive property and liability policy. It is designed to cover your rental property for almost anything that could go wrong, short of a few major catastrophes. One is a tiny, flimsy shield. The other is a full suit of armor.
If Your Property is Vacant, a DP-1 Might Be Your Only Option. Here’s Why.
The One Time a “Bare Bones” Policy Makes Sense.
There is one specific scenario where a DP-1 is the right tool. If your rental property is going to be vacant for an extended period (more than 30-60 days), most standard insurance companies will not be willing to offer a comprehensive DP-3 policy. An unoccupied property is a much higher risk for things like vandalism or undiscovered water damage. In this case, a basic, “named peril” DP-1 policy might be the only coverage you can get to at least protect the property from the primary risk of fire.
Don’t Be a Slumlord. Don’t Buy a Slumlord’s Insurance Policy (DP-1).
Professionalism Starts with Proper Protection.
A DP-1 policy is the choice of an amateur, a gambler, or a slumlord. It is a policy that signals you are willing to take on a massive amount of risk to save a few dollars. A professional, responsible landlord understands that their rental property is a significant financial asset and a serious business. They protect that business with a professional-grade insurance policy. They choose the comprehensive, reliable protection of a DP-3.