Texas landlord insurance: what a DP-3 covers

Short answer. A DP-3 is the "special form" dwelling policy, commonly used to insure a rental house in Texas. It covers the building against any cause of loss the policy does not exclude. Liability is not part of the Texas Department of Insurance's standard form (TDP-3), so check that your policy includes it.

A DP-3 is a dwelling policy, often called a landlord policy, rather than a homeowners policy. Many landlord policies help cover rent you lose while a covered loss is repaired. A DP-3 typically excludes theft, flood, foundation movement and your tenant's belongings. The declarations page (the policy's summary page) and the forms attached to it decide what a particular policy covers.

Moving from a homeowners policy

Most homeowners policies are made for the home you live in; the Texas Department of Insurance (TDI) warns that "most homeowners insurance won't cover damage to a rental property, or it might limit what it pays for" (TDI, Renting out your home?). When a tenant moves in, tell your insurance company or your agent, and move the house to a landlord policy. What changes, and when to switch: Homeowners vs landlord insurance in Texas.

DP-1, DP-2, DP-3: the form comes before the price

Dwelling policies come in three standard forms. Compare two quotes form to form before you compare their prices. A DP-1 and a DP-3 are different products, and the narrower form covers less.

Other insurers' forms can settle claims differently, so read the loss settlement section of the policy you are offered.

How Texas differs. TDI has its own standard Texas Dwelling Policy forms (TDP-1, TDP-2, TDP-3; last revised in 2002). Insurers may still use them, but many now use their own approved forms (Ins. Code §2301.052), and surplus-lines insurance companies use theirs. TDI described one such filed form, "DP 00 03TX", as "analogous to the Texas Dwelling Policy Form 3 (TDP-3)" (TDI Order No. 03-0110, 2003). We quote the TDI form in these guides because it is public. The coverage letters differ too: on the TDI form, Coverage B is personal property (TDP-3), while many other DP-3 forms use Coverage B for other structures. When you compare two policies, compare coverages by name, not by letter.

What a DP-3 typically covers

Replacement cost has a condition. Under the TDI form, full replacement-cost settlement on the house depends on the dwelling limit being at least 80% of the full replacement cost at the time of loss. Below that, it pays a proportionate share of the loss, or the actual cash value of the damage if that is more (TDP-3). Other forms have similar clauses. A dwelling limit left unchanged for years while rebuilding costs rose is one of the quieter ways a rental ends up underinsured.

How a roof claim is paid

Replacement cost pays today's repair cost, minus your deductible, at any roof age; actual cash value takes depreciation ("a decrease in value because of wear and age") off first, so on an older roof little or nothing may be left (TDI home insurance guide). TDI warns that "as roofs age, some companies will switch to actual cash value" (TDI, Insurance and your roof). TDI's worked example, roof schedules and what to check at renewal: Roof ACV vs replacement cost in Texas. If you replace the roof, tell your agent.

What a DP-3 usually does not cover

1. Liability, unless the policy includes it. The TDI dwelling form is a property form with no liability section. Many insurance companies include premises liability on their landlord policy; some do not. If your quote shows no liability limit, treat that as a finding, not a blank. See Landlord liability insurance in Texas.
2. Theft of your belongings. The TDI form says: "We do not cover loss by theft of any property … which at the time of loss is not an integral part of any structure." Some insurance companies offer limited theft coverage as an option.
3. Your tenant's belongings. TDI tells renters: "Your landlord's insurance won't cover your personal items" (TDI, renters insurance). A lease can require the tenant to carry renters insurance. See Landlord vs renters insurance in Texas.
4. Flood. "Most home policies don't cover damage caused by floods," and "most flood policies have a 30-day waiting period" (TDI home insurance guide). See Water damage and flood on a Texas rental.
5. Foundation movement. The TDI form excludes earth movement, and damage from settling or cracking of foundations. In Central Texas clay soils, that exclusion matters. Foundation damage that follows a covered water leak is a different question: TDI has said its form covers it, and that another insurer's filed form limits it (TDI Order No. 03-0110); other forms may limit it too.
6. Wear, tear and maintenance. Fixing a worn roof, a failed part or the leaking pipe itself is generally the owner's cost, even when damage it causes may be covered. How a hidden slow leak is treated depends on the form; see Water damage and flood on a Texas rental.
7. A long vacancy. Under the TDI form, if the building is "vacant for 60 consecutive days immediately before a loss," fire and lightning, and vandalism or malicious mischief, are not covered unless an endorsement (a form attached to the policy that adds or changes coverage) says otherwise. Other forms, and some insurance companies' rules, have their own vacancy limits. Tell your insurance company or your agent before a long gap between tenants or a renovation. See Vacant rental property insurance in Texas.
8. Short-term guests, unless the insurance company knows. Renting by the night or the week is a different risk from a 12-month lease. See Short-term rental insurance in Texas.

Two deductibles, not one

Texas rental policies often carry a separate wind and hail deductible next to the flat deductible for other claims, and it may be a percentage of the dwelling limit rather than a dollar amount (TDI, deductibles). On a $300,000 dwelling limit, a 2% wind and hail deductible is $6,000. The full explanation, with TDI's own example: Texas wind and hail deductibles, explained.

What surplus lines means on a landlord quote

Some Texas landlord policies are written by surplus-lines insurance companies. TDI describes them as "out-of-state companies that insure risks that companies in Texas won't insure. Although they don't have a Texas license, they must meet state standards to sell insurance here" (TDI home insurance guide). Before you buy one, know four things:

• Texas allows a surplus-lines policy only when the coverage can't be found, after a diligent effort, from a Texas-licensed insurer (Ins. Code §981.004). TDI says agents "must make a good effort to find coverage with a Texas-licensed company before selling you a surplus lines policy."
• The policy must carry a notice stating that TDI "does not audit the finances or review the solvency of the surplus lines insurer providing this coverage, and the insurer is not a member of the property and casualty insurance guaranty association" (Ins. Code §981.101).
• When Texas is your home state, a 4.85% surplus-lines tax applies to the premium (Ins. Code §225.004); Texas is the home state if you live here, and also if everything the policy insures is in Texas, as with a policy on one Texas rental owned from another state (§225.001(4)); otherwise another state's tax may apply. A small stamping fee applies too (SLTX), and policy fees may apply as well. Compare the total, not the premium alone.
• It is a different kind of contract, and you should know which kind you are buying. How the notice looks on a policy: reading your declarations page.

Before your next renewal: a short checklist

• Which form is it: DP-1, DP-2 or DP-3?
• Is liability on the policy? At what limit?
• The wind and hail deductible in dollars, and the all-other-perils deductible
• How is the roof settled: replacement cost, actual cash value, or by age? (roof age)
• Named insured matches the owner on the deed (LLC-owned rentals)
• Does the dwelling limit still reflect today's rebuilding cost?
• Loss of rent: how much, and for how long?
• Is the house rented short-term, and does the insurance company know?
• Is the insurance company admitted or surplus lines, and what are the fees and taxes?
• Does the lease require renters insurance?

At AIV Insurance we explain what your landlord policy includes, in plain words, before you choose. Unfamiliar term? See the glossary.