What is a dwelling fire policy? (2024 Coverage + Rates)

Dwelling Fire Policy Overview

If you’ve just begun researching homeowners insurance, you’ve probably noticed that there are many different ways to types of homeowners insurance — and that’s a good thing. However, figuring out which policy type best fits your needs can get overwhelming. If your home doesn’t meet standards for typical home insurance, you may be offered something called dwelling fire insurance coverage. But what is a dwelling fire policy? How does it differ from other home insurance policies?

This expert guide will walk you through the dwelling fire insurance policy. After you’ve finished this guide, you’ll have all the information you need to make the wisest decision for yourself and your home.

We’ll also discuss the pros and cons of purchasing a dwelling fire policy and walk you through filing a dwelling fire policy claim. Let’s get started.

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What’s the difference between a dwelling fire policy and a homeowners insurance policy?

A long time ago, all property insurance — be it business or personal — was limited to protection from fire and lightning. This meant that property owners were out of luck if anything besides a fire caused damage to their property.

“Standard fire insurance” was the norm until 1958, when homeowners insurance was introduced. Standard homeowners insurance, unlike fire insurance, offered comprehensive coverage for individual properties.

It was around this time that the term “dwelling fire policy” was born.

Comparing homeowners insurance to dwelling fire insurance may seem like comparing two similar things. However, these policies are designed for the building under separate circumstances.

A dwelling fire policy is designed to insure only your dwelling, which is the outer structure of your home. If there is a fire in your home, this policy will cover any damages to its outer structure.

Despite what its name suggests, a dwelling fire policy can also protect your dwelling from other perils like hail, theft, and vandalism.

A dwelling fire policy does not cover the objects and appliances inside your home. It also does not insure other structures on your property or provide home liability coverage.

A homeowners insurance policy is designed to protect your property and home against unexpected disasters that cause damage. However, this policy does not include protection against fire damage to the structure of your residence and the possessions inside.

Here’s a quick comparison of dwelling fire coverage vs. other common home insurance policies.

Home Insurance Policy Types

Because a dwelling fire policy only covers the outer structure of your home, it is significantly cheaper than a standard home insurance policy. In 2016, the National Association of Insurance Commissioners found that the average cost of a dwelling fire policy was $651 nationwide. In comparison, the average cost of a standard home insurance policy was $1,192.

Average Policy Form Rates

The NAIC also found that the median amount of home insurance is significantly lower for dwelling fire policies than it is for standard homeowners policies. While the median amount of insurance for dwelling fire policies begins at $75,000, the median amount for standard homeowners policies begins at $150,000.

Even though standard homeowners insurance has become the most common policy today, dwelling fire policies still have a place in property insurance. In 2013, the NAIC found that 2.2 percent of the nation’s homes were insured with dwelling fire policies.

Who needs a dwelling fire policy?

So who is purchasing dwelling fire policies and why? Let’s take a look at the situations where you might choose dwelling fire.

Dwelling fire policies can be very useful for landlords. In fact, most landlord policies are dwelling fire.

A landlord can purchase a dwelling fire policy if they’d like to insure the home they’re renting but this does not extend to whatever personal property their renter has within. Often, the landlord may require a few thousand dollars to cover appliances or objects they’ve furnished to their renter.

In this case, most insurers will also offer a small amount of contents coverage in addition to their policy’s dwelling fire coverage.

If you’re renting your property, make sure to inquire about what’s covered under your landlord’s insurance policy. If your landlord’s only form of insurance is a dwelling fire policy, your personal property may not be insured.

It is a common insurance myth that your landlord’s policy will cover your personal possessions, and it leaves thousands of people without insurance for their destroyed belongings each year. According to the Insurance Information Institute, in 2014 only 37 percent of renters carried renters insurance. If your personal property is not insured by your landlord’s dwelling fire policy, make sure to purchase a renters insurance policy that can protect your valuables.

Dwelling fire policies can also be used to insure vacant properties.

“In today’s real estate market, it is not uncommon for homeowners to buy a new home without selling their old one first,” says Loretta Worters, Vice President of Media Relations at the Insurance Information Institute.

If homeowners move into a new home before selling their old one, however, they are putting their vacant home at significant risk. According to a study by the Lincoln Institute of Land Policy, blocks with vacant properties face crime rates twice as high as blocks without them.

Here’s an example of the risks facing vacant property:

In this kind of scenario, a dwelling fire policy is a low-cost way to protect a home that doesn’t require personal property or liability coverage.

A dwelling fire policy may also be beneficial for:

• Vacation or seasonal homes
• Secondary homes
• Older homes

Lastly, although it is possible to purchase a dwelling fire policy for a home you own and occupy as a primary residence, it is not recommended. A dwelling fire policy is extremely restrictive. It will not protect you from personal property damage, liability risks, and perils that are not named on the policy.

To determine whether or not a dwelling fire policy is useful for your property, you must understand the specifics of how it protects your home. Next, we’ll go over what a dwelling fire policy covers in detail.

What does a dwelling fire policy cover?

We now understand that the dwelling fire policy covers the outer structure of your home, but property insurance is a little more complicated. For one thing, there are multiple dwelling fire policy types. The three major types are called DP1, DP2, and DP3 policies.

Each type has its own loss settlement method, named or special perils, and coverage limit. Let’s break down each component before outlining the three policy types.

How are dwelling fire claims handled?

The first component is a policy’s loss settlement method. There are two loss settlement methods an insurer can offer you; either a replacement value policy or an actual cash value policy.

If you have a replacement value policy, you will be reimbursed for the amount of money it costs to replace your dwelling if it is damaged by a named peril. You will likely be required to purchase a replacement cost policy if you have a mortgage, as this ensures that the bank will have their asset rebuilt in the event of a total loss.

If you have an actual cash value policy, it means you’ll be reimbursed for the actual cash value of your dwelling if it is damaged by a named peril. Actual cash value policies are typically purchased for lower-value properties, mortgageless properties, and properties of lower conditions.

Next, let’s go over the difference between named perils and special perils coverage.

What perils do dwelling fire policies cover?

The second component is the perils you are insured against. No matter how extensive your policy is, your company will deny your claim if your dwelling is damaged by a peril you are not insured against.

There are two basic types of coverage within dwelling fire policies.

The first type of coverage is called named perils coverage. If you have named perils coverage, your dwelling is only insured against the perils listed in your policy. If your dwelling is damaged by a peril not listed on your policy, the damage will not be covered by your insurer.

For example, if your dwelling fire policy lists hail as an insured peril and your roof is damaged in a hailstorm, you will be covered by your insurer. If, however, your roof is damaged by snow and snow is not listed as an insured peril on your policy, you will not be covered by your insurer.

The second type of coverage is called special coverage. If you have special perils coverage, your dwelling will be insured against all perils except those your policy explicitly states it will not cover.

Special perils coverage may also be referred to as open perils or all perils coverage, though insurers shy away from the term “all perils” because no policy covers you against all possible causes of property damage. Flood damage, for example, often requires a separate insurance policy altogether. You can buy flood insurance through the National Flood Insurance Program, and it’s sold by most insurance companies.

What are the coverage limits of dwelling fire policies?

The final component of any dwelling fire policy is its coverage limit. This is the cap on the amount of money you’ll receive from your insurer in the event of peril. In general, homeowners pay higher insurance premiums for higher coverage limits.

Because purchasing a coverage limit that adequately insures your property can get expensive, many Americans are underinsured.

A recent study by the Southwestern Insurance Information Service found that 50 to 70 percent of homes in Texas are underinsured.

Underinsuring your home can put your property at risk and may even result in a coinsurance penalty, so make sure to purchase a policy with coverage limits that adequately fit your needs.

What are the dwelling fire policy types?

Now that we’ve covered the three components of a dwelling fire policy, let’s break down the three major dwelling fire policy types: DP1, DP2, and DP3.

A DP1 policy, also known as a Basic Dwelling Policy, is the most limited form of dwelling fire coverage, as it only covers named perils. Here’s a list of perils commonly listed on a DP1 policy:

• Fire
• Smoke
• Lightning
• Explosions
• Hail
• Windstorms
• Theft
• Vandalism

A DP1 policy is also an actual cash value policy. If your damaged dwelling is insured by a DP1 policy, you’ll only receive compensation for the amount your damaged structure was worth. You won’t receive compensation for the amount it would cost to replace your damaged structure. Bear in mind that, no matter how you are compensated, the compensation is bound by your coverage limit.

A DP2 policy, also known as a Broad Dwelling Policy, is a more expansive version of a DP1 policy. It covers the same perils listed in a DP1 policy and includes additional perils like snow and ice damage, electrical damage, and falling objects.

Unlike a DP1 policy, a DP2 policy reimburses you with replacement costs rather than actual cash value. This means that, if your dwelling suffers damage under a DP2 policy, your insurer will cover the cost of replacing what was damaged. Again, your insurer will only reimburse you within the boundaries of your coverage limit.

A DP3 policy, also known as a Special Dwelling Policy, is the most extensive form of dwelling fire coverage. A DP3 policy covers all perils except perils explicitly stated in your policy. Like the DP2, it’s also a replacement value policy. In some cases, a DP3 policy also covers appliances and furnishings on the insured property.

If all this talk of DP1, DP2, and DP3 policies is getting confusing, this comparison chart will help you distinguish the policies from each other:

Dwelling Fire Policy Comparison

Now that you know what a dwelling fire policy covers, let’s go over the pros and cons of each policy type.

DP1, DP2, & DP3 – Which dwelling fire policy is best?

Each of the policies we’ve gone over has its benefits and disadvantages. Let’s review their major pros and cons.

Dwelling Fire Policy Pros And Cons

Because the DP1 is the cheapest dwelling fire policy, it’s an economical choice if you want to insure a vacant home. You can get basic protections while paying less than you would for a DP3 policy or standard home insurance policy.

However, we don’t recommend that you choose a DP1 as the only form of insurance for your main property, as it provides limited coverage for only the outer structure.

The DP3 policy, on the other hand, offers comprehensive dwelling coverage. Dwelling coverage is a great choice if you want to protect your dwelling from as many perils as possible. The one major downside is that it’s significantly more expensive than the other two types. A covered peril includes damages from fire, smoke, lightning, wind, hail, vandalism, and theft.

If you can’t afford a DP3 policy, the cheaper DP2 may strike a good balance between basic and comprehensive coverage. With a DP2 policy, you can purchase policy extensions that fit your home and community environment. If, for example, you live in an area with heavy snowfall, you can customize your policy by adding snow and ice as named perils.

Dwelling Fire Policies: The Bottom Line

A dwelling fire policy can provide limited coverage to the outer structure of your property. While this type of policy can be useful for landlords or vacant homeowners, it is not a safe substitute for a standard homeowners policy. Don’t be tempted to purchase this cheaper policy in lieu of proper coverage. Most dwelling fire insurance companies also sell homeowners, so compare your options.

Without a standard homeowners policy, you will not receive adequate personal property or liability coverage. If you purchase a DP1 or DP2 policy, you also will not receive comprehensive perils coverage. These coverages are vital to maintaining a safe and protected household.

That being said, a dwelling fire policy can be a useful coverage in the right situation and in combination with other policies.

If you’re a landlord using a dwelling fire policy, make sure your renters have purchased insurance that will cover their personal belongings. If you’re a homeowner purchasing a dwelling fire policy for your main property, make sure you’ve purchased additional policies that will insure you against other hazards.

Note that dwelling insurance will not cover damage from improper maintenance of the structure, floods, earthquakes, or water damage.

Contact a local insurance agent for more information about how dwelling coverage and homeowners coverage can offer you protection.

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