2.2 Arkansas Commercial Property Insurance

Structure of a Commercial Property Policy

A commercial property policy is assembled in modules. You combine a coverage form (what is insured) with a separate Causes of Loss form (which perils apply), then add Common Policy Conditions and the Commercial Property Conditions. The most-tested coverage form is the Building and Personal Property Coverage Form (CP 00 10).

What CP 00 10 Insures

The Three Causes of Loss Forms

• Basic (CP 10 10): Named perils — fire, lightning, explosion, windstorm, hail, riot, vandalism, sprinkler leakage, and similar listed perils.
• Broad (CP 10 20): Basic plus breakage of glass, falling objects, weight of snow/ice/sleet, and water damage.
• Special (CP 10 30): Open perils — covered unless excluded. This is the broadest and is the exam's default answer when a question describes "all-risk" or "comprehensive" commercial coverage.

Trap: Flood and earthquake are excluded under all three; they require a separate flood policy or a Difference-in-Conditions endorsement. Equipment breakdown (boiler and machinery) is also excluded and bought separately.

Business Income, Extra Expense, and Coinsurance

Business Income (CP 00 30 / CP 00 32)

When a covered direct physical loss suspends operations, business income coverage pays for:

• Lost net income (the profit the business would have earned), plus
• Continuing normal operating expenses such as rent, loan payments, and key payroll, during the period of restoration.

The period of restoration begins 72 hours after the loss (for the standard form) and ends when the property should be repaired with reasonable speed — not when the business actually chooses to reopen. An extended period of indemnity option continues coverage while the business rebuilds its customer base.

Extra Expense

Extra expense coverage pays the additional costs to keep operating or to reopen faster — renting a temporary location, expediting equipment, paying overtime. A restaurant that leases a food truck after a kitchen fire is claiming extra expense, not lost income.

The Coinsurance Penalty — Worked Example

Commercial property almost always carries an 80%, 90%, or 100% coinsurance clause. The insured must carry insurance equal to at least that percentage of the property's value at the time of loss:

Required = Value × Coinsurance % Payment = (Carried ÷ Required) × Loss − Deductible

Example: A warehouse is worth $1,000,000 with an 80% coinsurance clause. The owner carries only $600,000. A $200,000 fire and a $2,500 deductible:

• Required = $1,000,000 × 0.80 = $800,000
• Payment = ($600,000 ÷ $800,000) × $200,000 = 0.75 × $200,000 = $150,000
• Less the $2,500 deductible = $147,500

The owner becomes a co-insurer for the $50,000 shortfall because they carried only 75% of the required amount.

Exam Tip: If "Carried ÷ Required" is 1.0 or higher, there is no penalty — pay the loss in full up to the limit, minus the deductible. Coinsurance never increases a payment above the policy limit.

Arkansas Rules Applied to Commercial Property

The Arkansas state-section layer for commercial property is the same regulatory framework you learned for homeowners: Rule and Regulation 43, Unfair Claims Settlement Practices, governs how a commercial claim is handled, and the Arkansas Insurance Department enforces it.

The state-law issues that surface most often on commercial questions are form filings, required notices, cancellation and nonrenewal, and fair claim handling — not the definition of covered property, which is national ISO content. Arkansas's bad-faith and 12% penalty exposure for unreasonable delay applies to commercial insureds as well.

Valuation and Optional Coverages

• Valuation: The default is actual cash value (ACV) unless the Replacement Cost optional coverage is activated on the declarations. Replacement cost ignores depreciation.
• Agreed value option: Suspends the coinsurance clause when the insured files a statement of values and carries 100% — useful so a partial loss is never reduced by a coinsurance penalty.
• Ordinance or Law (CP 04 05): Pays the added cost to demolish undamaged portions and rebuild to current Arkansas building codes after a loss.
• Inland marine handles property in transit or off-premises (contractor's equipment, signs, fine arts) that the building form does not reach.

A Commercial Scenario

An Arkansas manufacturer suffers a fire that halts production. Read it as layered: the Building/BPP form pays the direct damage; business income replaces lost profit and continuing payroll during the period of restoration; extra expense funds a temporary rented plant; coinsurance reduces the BPP payment if the inventory was under-insured; and Rule 43 governs the acknowledgment, proof-of-loss, and decision deadlines.

Exam Tip: For any commercial loss, first classify the dollars — direct property, income, or extra expense — then apply valuation and coinsurance, and only then check the Arkansas claims-handling deadline the question is really testing.