HO3 vs DP3 vs Commercial Policies: Which is Best for Landlords?

Some landlords may think they can save money by purchasing a DP3 policy instead of a commercial policy for landlords. However, your rental business is a commercial enterprise, and anything less than commercial landlord insurance can leave landlords exposed to uncovered risks. Before making up your mind, it’s important to understand the differences between DP3 versus commercial policies and why the latter may offer better protection for your rental business.

What are DP3 insurance policies?

DP3 is a Dwelling Fire Policy for buildings with one to four units. Landlords sometimes use a DP3 policy for their rental properties. It can provide coverage on an open peril basis, which means it covers all perils except for those specifically listed as excluded in the policy, and it can provide replacement cost value coverage.

Is DP3 insurance the same as HO3?

DP3 and HO3 insurance policies have many characteristics in common, but they are not the same. Although the available coverage is often similar, one of the biggest differences between these two coverage types is that HO3 policies can typically only be used if the owner of the property lives in one of the units. If the owner does not live in a unit on the property, a DP3 or commercial policy can be used.

HO3 policies are not designed for commercial use. In fact, commercial activities – which include renting out the property – may be excluded. This means landlords who purchase HO3 policies for rental properties may find they don’t have coverage after a loss. To avoid major coverage gaps and rejected claims, it’s critical to make sure you’re buying the right type of insurance policy for your situation.

What other insurance options do landlords have?

When you rent out your property, it's important that you start treating the property as a business and protect it accordingly. A DP3 policy may not provide all the coverage types landlords need to protect their rental business. One option is often considered advantageous is a commercial insurance policy for landlords. Commercial policies designed for landlords can offer broad protection, including property insurance, income loss coverage, and liability insurance. Honeycomb Insurance provides robust commercial insurance policies designed specifically for landlords. We make it easy to find customized, affordable coverage. You can get a free quote here. 

Does landlord insurance cover the tenant’s belongings?

Regardless of the type of landlord insurance coverage you buy (H03, DP3 or commercial), it will likely exclude the tenant’s property. For example, if a fire damages the building and the contents inside, the landlord’s insurance can cover the cost to repair the building (which is the landlord’s property), but it will not cover the cost to repair or replace the tenant’s furniture, clothes, and other personal property.

Tenants should secure their own renters insurance to protect their personal property. In fact, since renters insurance policies often provide some liability protection, many landlords require tenants to maintain renters insurance as part of the rental agreement. Doing so can help landlords avoid disputes after a loss.

How do I know what type of coverage I need?

Your insurance needs may not be exactly the same as another landlord. However, in general, landlords need robust commercial property insurance along with loss of income coverage and liability protection to protect their investment and rental income.

When reviewing your insurance options, ask yourself the following questions:

1. Does the policy offer coverage for loss of income? If your rental property is damaged, you may be unable to rent it until you’ve completed the necessary repairs, which can mean months of missed income. In the meantime, you’ll still have to pay expenses such as taxes and loan repayments.
2. Does the policy offer replacement value coverage? Your building may depreciate over time. For example, a roof you installed a decade ago will have lost value. If your policy pays claims on an actual cost basis, your payout will be decreased to reflect depreciation, meaning you’ll need to pay the difference out of pocket. This is why replacement cost coverage offers important protection.
3. Does the policy offer ordinance or law coverage? When they need repairs, many property owners are caught off guard by the additional costs that insurance doesn’t cover to meet local building codes and regulations. Adding ordinance or law coverage provides financial protection against this possibility. DP3 policies may exclude this coverage, but you can secure ordinance or law coverage as an add-on to a commercial policy.
4. Does the policy offer equipment breakdown coverage? Property insurance does not typically include coverage for equipment breakdown, which can be a major source of unexpected expenses for landlords. You may be able to secure this coverage as an add-on.
5. Does the policy offer robust liability coverage? Landlords have many liability exposures. For example, imagine that a guest is injured after tripping on your property. You could be sued for the costs associated with the resulting injuries. Securing robust liability coverage can shield you from the financial consequences of a lawsuit. As not all liability coverage is the same, make sure you understand exactly what type of claims a particular policy covers and what your limits are. A good rule of thumb is to have $1 million in liability coverage per tenant. DP3 policies don’t typically offer this level of coverage, but commercial policies can.
6. Does the policy exclude or limit coverages you need? You don’t want to find out that you lack coverage for a loss or that coverage is limited only after you file a claim. Look for exclusions. A named peril policy will only cover the losses listed in the policy, whereas an open peril policy will cover any losses that it doesn’t list as excluded. Either way, make sure you’re receiving the coverage you need before you buy.

Also look for clauses that reduce your limits or charge higher deductibles for certain types of losses. These clauses may be reasonable, but you need to make sure you’re prepared to pay for the higher costs if you do suffer a loss.