Understanding Your Insurance Policy Coverage

It’s very important for Outer banks homeowner’s and buyer’s alike to understand the differences between the two main types of policies that are available for vacation rental or second homes.  Often homeowner’s shop for the least expensive policy upfront only to have it cost them in the long run and when it comes to insurance coverage, there is no truer statement than “YOU GET WHAT YOU PAY FOR”.

The majority of insurance policies on the Outer Banks are written on either a homeowner’s policy form (HO3) or the dwelling/fire policy form (DP2).  While both policies provide the basic coverage required by your mortgage company, the homeowner policy (HO3) provides much broader coverage and has several endorsements that are simply not available on the standard dwelling/fire policy (DP2).  Most homeowner’s across the country have their primary home insured on the HO3 policy because of its superior coverage, however select a dwelling/fire policy (DP2) for their second and rental homes.

Here are some of noteworthy differences between the two:

  • The HO3 is a special form policy while the DP2 is a named peril policy. Thus, the DP2 only provides coverage for the “perils” specifically named in the policy whereas the HO3 covers all perils except that which is excluded in the policy.
  • The HO3 provides coverage for “Wind Driven Rain”, while the DP2 does not. Please note: Wind driven rain is the #1 source of claims on the Outer Banks.
  • The HO3 provides liability coverage, while the DP2 does not. A separate liability policy may be purchased with a DP2.
  • The HO3 provides coverage for theft, while the DP2 does not. A separate theft policy may be purchased with a DP2; however the coverage is very limited.
  • The HO3 provides “Replacement Cost” basis for the contents of the home while the DP2 only offers “Actual Cash Value” on a depreciated basis. Meaning, the electronics that you purchased 5 years ago for $2000 may now only be worth $200 on a depreciated basis.
  • Finally, and perhaps most importantly, the HO3 provides an endorsement called “Specified Additional Amount of Insurance”. This endorsement provides an additional 25% of coverage in excess of the insured value of your home.  Following a natural disaster, such as a hurricane, the cost of labor and materials can escalate greatly.  Without the additional 25%, the amount of coverage may not be enough to replace the destroyed dwelling with another of similar kind and quality.  This endorsement is simply not available with a DP2 policy.

In summary,  the HO3 policy is usually slightly more expensive than the DP2 policy, however most people will find themselves very disappointed with the shortfalls of a DP2 policy should the need arise to make a claim. A home, primary or otherwise, will be one of the largest investments you ever make, so make sure you choose an insurance policy that reflects that and remember “YOU GET WHAT YOU PAY FOR”!

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