1. Forms
2. DP
3. DP-04-63

Form DP 04 63: Additional Living Cost And Fair Rental Value

1. What the form is

The DP 04 63 endorsement, titled "Additional Living Cost And Fair Rental Value," is designed to be added to Dwelling Property policies (DP 00 01, DP 00 02, and DP 00 03). Its primary purpose is to provide financial protection to the insured if the insured dwelling becomes uninhabitable due to a loss caused by a covered peril. This endorsement covers two key areas:

• Additional Living Cost (ALC): This part of the coverage reimburses the insured for any necessary increase in living expenses incurred to maintain their normal standard of living if the dwelling they occupy becomes uninhabitable. For example, if a fire damages the insured's home, this coverage would help pay for temporary accommodation like a hotel or rental, increased food costs from eating out, and other reasonable expenses that exceed their normal household budget.
• Fair Rental Value (FRV): If a portion of the dwelling rented to others, or held for rental, becomes uninhabitable due to a covered loss, this coverage reimburses the insured for the lost rental income. For instance, if a landlord owns a duplex and one unit becomes uninhabitable after a storm, this coverage would compensate for the rent they are unable to collect during the repair period.

This endorsement essentially adds or broadens the scope of Coverage D (Fair Rental Value) and Coverage E (Additional Living Expense) found in the base Dwelling Property forms. In the DP 00 01 (Basic Form), Fair Rental Value is typically included but Additional Living Expense must be added by an endorsement like DP 04 14 or this combined endorsement. For DP 00 02 (Broad Form) and DP 00 03 (Special Form), both coverages are usually included, but this endorsement can modify or clarify the terms. The DP 04 63 ensures these coverages are clearly defined and provides a specific limit of liability for them, which is often a percentage of the Coverage A (Dwelling) limit.

2. Classes of business it applies to

This endorsement is specifically for properties insured under a Dwelling Property policy. These policies are typically used for:

• Non-owner-occupied dwellings: This is a primary use case. Landlords who rent out single-family homes, duplexes, or other residential properties would benefit significantly from Fair Rental Value coverage to protect their rental income stream if a covered loss makes the property uninhabitable. For example, if a tenant has to move out due to a kitchen fire, the landlord can recover the lost rent.
• Owner-occupied dwellings not eligible for a Homeowners policy: Sometimes a property might be owner-occupied but not qualify for a standard Homeowners (HO) policy due to age, condition, or other underwriting reasons. In such cases, a Dwelling Property policy with the DP 04 63 endorsement would provide crucial Additional Living Cost coverage if the owner is displaced. For example, an individual living in an older home that sustains significant water damage from a burst pipe would have coverage for temporary housing.
• Vacation homes or seasonal dwellings: Homes that are not the insured's primary residence can be covered by a Dwelling Property policy. If the insured sometimes rents out their vacation home, Fair Rental Value coverage would be important. If they use it personally and it becomes uninhabitable, Additional Living Cost coverage could apply to offset costs of alternative vacation arrangements or loss of use.
• Dwellings under construction (if the intended occupant is the named insured): While specific endorsements like DP 11 43 address dwellings under construction, the need for ALC/FRV could arise if, for example, a nearly completed home intended for rental becomes uninhabitable due to a covered event.

3. Special considerations

• Covered Perils: The loss rendering the dwelling uninhabitable must be caused by a peril insured against in the underlying Dwelling Property policy. If the cause of loss is excluded (e.g., flood, unless flood insurance is also in place), this endorsement will not provide coverage.
• "Uninhabitable" Standard: The dwelling must be genuinely unfit for its normal use. Minor damage that doesn't prevent occupancy will not typically trigger this coverage. The definition of "uninhabitable" can sometimes be a point of discussion, and local health or safety regulations may play a role.
• Period of Restoration: Coverage for ALC and FRV is generally limited to the shortest time required to repair or replace the damaged property, or for the insured to relocate permanently if they choose not to rebuild. There might also be a maximum time limit stated in the policy (e.g., 12 or 24 months).
• Civil Authority: Most policies, often through this endorsement or base form language, provide ALC/FRV coverage for a limited period (e.g., two weeks) if a civil authority prohibits access to the dwelling due to direct damage to a neighboring property by a covered peril. For example, if police evacuate a street due to a fire at a nearby house.
• Limits of Liability: The amount of coverage for ALC and FRV is typically a percentage of the Coverage A (Dwelling) limit (e.g., 20%). It's important to ensure this limit is adequate for the potential costs in the specific geographic area. Some versions of endorsements like DP 04 14 (Additional Living Expense only) may have monthly limitations (e.g., 25% of the total ALC limit per month).
• Maintaining Normal Standard of Living: For ALC, the coverage is for the increase in expenses needed to maintain the household's normal standard of living. It doesn't cover expenses that would have been incurred anyway (like a mortgage payment) or allow for an upgraded lifestyle during displacement.
• Documentation: Insureds will need to keep detailed records and receipts for all additional living expenses and for proving lost rental income.
• Relation to DP 00 01: For the DP 00 01 Basic Form, Fair Rental Value (Coverage D) is often included, but its use reduces the Coverage A limit. Additional Living Expense (Coverage E) is typically not included unless added by an endorsement like DP 04 14 or DP 04 63. When added by endorsement, these coverages are usually additional insurance and do not reduce the Coverage A limit.

4. Key information for agents and underwriters

• Pricing: The premium for this endorsement will depend on the limit of liability selected for ALC/FRV, which is often tied to the Coverage A amount. Higher Coverage A limits will naturally lead to potentially higher ALC/FRV exposure and thus a higher premium for the endorsement. The underlying perils covered by the base policy also influence the overall premium.
• Risk Assessment:
  • For Fair Rental Value: Underwriters should assess the rental market in the property's location. Higher rental rates mean higher potential FRV claims. The number of rental units in the dwelling is also a key factor. A multi-unit dwelling has a higher FRV exposure than a single-family rental.
  • For Additional Living Cost: Consider the local costs for temporary housing (hotels, short-term rentals) and general living expenses. Areas with high costs of living will present a greater ALC exposure. The size of the insured's household can also impact potential ALC.
  • Property Condition and Location: Properties in areas prone to certain perils (e.g., windstorms, wildfires) may have a higher likelihood of becoming uninhabitable. The age and condition of the dwelling can also influence its susceptibility to damage that could trigger ALC/FRV.
• Coverage Gaps:
  • Ensure clients understand that this coverage is only triggered by perils covered under their Dwelling Property policy. Excluded perils like flood or earthquake (unless specifically added) will not activate ALC/FRV.
  • Discuss the adequacy of the ALC/FRV limit. A standard percentage might not be sufficient in high-cost areas or for larger families/properties with significant rental income. Agents should offer options to increase these limits if available and appropriate.
  • Explain the time limitations on the coverage. If repairs are delayed significantly beyond the policy's maximum time limit for ALC/FRV, the insured could face out-of-pocket expenses.
• Underwriting Guidelines:
  • Review the property's use carefully. Is it owner-occupied, tenant-occupied, seasonal, or vacant? This impacts the primary need (ALC vs. FRV).
  • For rental properties, verify the existing rental income to establish a baseline for potential FRV claims. Lease agreements can be useful documentation.
  • Consider the availability and cost of comparable temporary housing in the area when evaluating ALC exposure.
  • Be aware of any "special limits" or specific provisions within the endorsement or base policy that might affect ALC or FRV. For example, older versions of loss assessment endorsements (like a previous DP 04 63 for loss assessment, not ALC/FRV) had special limits for assessments due to the association's master policy deductible; while this specific form is for ALC/FRV, it's a reminder to check for any such nuances.