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Sorry for confusion, finally I was able to make it work, the trick was with the server names, I had to add another server name to the main JRE java.policy file, i.e. in the format of:
permission java.net.SocketPermission "my-dev-server1:0", "resolve";
permission java.net.SocketPermission "my-dev ...

According to the following Java documentation:
https://docs.oracle.com/javase/7/docs/technotes/guides/javaws/developersguide/syntax.html
If the all-permissions element is specified, the application has full access to the client machine and local network. All JAR files must be signed. The user is ...

In my JNLP file I have the following:
<security>
<all-permissions/>
</security>

I reverted all the changes made to all the following files to the original default contents:
deployment.config
deployment.properties
java.policy

in the following paths:
C:\Program Files\Java\jre1.8.0_251\lib ...

I don't have different value specified in "<User Home>\.config\icedtea-web\deployment.properties", this is the contents:
#Netx deployment configuration
#ows.install4j.propertyUpdate=1599235195818
#Tue Sep 08 10:00:57 EDT 2020
deployment.javaws.shortcut=ASK_USER
deployment.log=true
deployment ...

I have a single line there:

Janak, thank you for your quick response!

I am using Open Webstart 1.2.1, with JVM 1.8.0_251 Oracle Corporation, Windows x64 C:\Program Files\Java\jre1.8.0_251.

"<User Home>\.cache\icedtea-web\jvm-cache\cache.json" contains the following:
{
"runtimes": [
{
"version": "1.8.0_251",
"vendor ...

Below is my setup, please advise.

I get:

java.security.AccessControlException: access denied ("java.net.SocketPermission" "my-dev-server" "resolve")

Running on Windows 64-bit:
java version "1.8.0_251"
Java(TM) SE Runtime Environment (build 1.8.0_251-b08)
Java HotSpot(TM) 64-Bit Server VM ...