Landlord Insurance (DP-3) vs. Homeowners (HO-3): Why You Can't Keep Your Old Policy

A common scenario in the real estate journey is the "accidental landlord." You buy a new house, but instead of selling your old one, you decide to keep it and rent it out. It seems simple enough: find a tenant, sign a lease, and collect the rent. In the chaos of moving, many new landlords forget one critical step: changing their insurance.

They assume their existing Homeowners Policy (HO-3) will continue to cover the house. After all, it's the same house, right?

Wrong. This is a catastrophic coverage gap waiting to happen. Homeowners insurance is strictly for owner-occupied properties. The moment you move out and a tenant moves in, the risk profile of that property changes fundamentally. If you file a claim on a rental property while holding a homeowner's policy, the insurer will deny the claim and likely void the policy for "material misrepresentation."

To protect a rental property, you need a specific type of coverage known as a Dwelling Fire Policy, most commonly a DP-3. This guide explores the critical differences between HO-3 and DP-3 policies, the specific protections landlords need, and why "Fair Rental Value" is your new best friend.

The Core Difference: Occupancy

Insurance underwriting is based on who lives there.

• HO-3 (Homeowners): Assumes the owner lives there. Owners take better care of homes, notice leaks faster, and don't sue themselves. Coverage includes the structure and all contents.
• DP-3 (Landlord): Assumes a tenant lives there. Tenants are statistically higher risk. They may not report maintenance issues immediately. Coverage focuses on the structure but limits contents coverage (since the tenant owns their own furniture).

What Does Landlord Insurance Cover?

1. The Structure (Coverage A): Like a homeowners policy, this covers the house itself from fire, wind, hail, etc. You should still insure it for its full Replacement Cost.

2. Landlord's Personal Property (Coverage C - Limited): Unlike your home policy which covers everything you own, a DP-3 only covers items you own that are used to service the rental.

• Covered: The refrigerator, the stove, the lawnmower you leave in the shed for the tenant.
• Not Covered: The tenant's clothes, furniture, or electronics. (The tenant needs their own Renters Insurance for this, as discussed in our renters insurance guide).

3. Fair Rental Value (Coverage D): This is the landlord version of "Loss of Use." If a fire makes your rental property uninhabitable, you don't need a hotel (you don't live there). What you need is the lost rent.

• How it works: If your tenant pays $2,000/month and the house takes 6 months to rebuild, Fair Rental Value pays you that $12,000 in lost income. This is vital for landlords who rely on rent to pay the mortgage.

The Liability Shift: "Wrongful Eviction"

Liability on a rental is tricky. You aren't just liable if someone slips on the sidewalk; you are liable for your conduct as a landlord.

• Premises Liability: Standard slip-and-fall coverage.
• Personal Injury (The Landlord Special): This covers you if the tenant sues you for Wrongful Eviction, Invasion of Privacy (entering without notice), or Libel/Slander. As we discussed in our Personal Injury guide, this is not always automatic. You must ensure your DP-3 includes this specific endorsement.

Cost Comparison

Landlord policies typically cost 15% to 25% more than a standard homeowner's policy on the same house.

• Why? The increased risk of tenant negligence and the potential for lost rent claims.
• The Offset: Remember that landlord insurance premiums are generally a tax-deductible business expense (consult your CPA), which helps offset the higher cost.

Short-Term vs. Long-Term

A DP-3 is designed for long-term leases (6 months or more). If you are doing Airbnb/Vrbo style renting, a standard DP-3 may still have gaps regarding business activity and turnover. You would need a specific Short-Term Rental policy.

Conclusion

Transitioning a home from a residence to a rental is a business decision, and it requires a business insurance policy. Do not try to fly under the radar with your old HO-3 policy. The savings are negligible compared to the risk of having a total loss fire claim denied because you didn't live there. Call your broker, switch to a DP-3, and require your tenants to carry their own renters insurance to create a complete circle of protection.