Consequential Loss: Definition & Examples

KEY TAKEAWAYS

• A consequential loss comes from indirect property damage.
• Consequential loss policies will help cover certain losses if there are business interruptions.
• Taking out a consequential loss policy is separate from a policy that covers physical damage to equipment or property. 

What Is Consequential Loss? 

Consequential loss is a type of business interruption insurance. It helps cover collateral damage that might happen because of damage to things like property and equipment. Essentially, a business can purchase insurance to cover an adverse impact that comes from damage to a tangible unit.

There is also coverage that can get purchased to cover secondary losses. But having a consequential loss policy or clause will help cover things like lost business income. It can also frequently get referred to as business income insurance. 

Businesses regularly purchase types of casualty insurance to help cover potential damages to different areas of their business. These often happen due to things like fire, flood, theft, or natural disasters. 

It’s worth noting that these types of direct coverage policies aren’t going to compensate you for any lost income if you can’t use the property or equipment. However, it works a little differently if indirect losses happen because of physical damage that affects business operations. In this case, these damages could be considered consequential losses. 

The best way to think about consequential losses is in the form of ongoing expectations, like fixed operational expenses or salaries. 

Example of Consequential Loss Coverage 

Most insurance companies are going to separate types of damage into two categories. The first is primary or direct damage, which can come from something like a fire destroying a business. The other is consequential loss or indirect damage, which can come from a fire completely stopping business operations. 

Let’s say that you take out a business income insurance policy that includes property insurance with coverage for a natural disaster. You want to protect your operational expenses and limit the loss of income, which is why you also took out separate coverage. 

If a tornado unfortunately destroyed your business, you would get covered for certain things. The property insurance would cover things like the physical damage and if you have a loss of inventory. 

The separate coverage you took out would reimburse you for the loss of business revenue. But this only happens if the indirect loss comes from your business temporarily closing. 

Insurance Policy for Consequential Loss 

There are certain insurance policies that cover consequential loss, such as business interruption insurance. The policies are designed to help compensate a business for loss of revenue, regardless of physical damage, if a catastrophic event occurs. 

Typically, interruption insurance will start from the moment an adverse event occurs and continue until the business can start operating again. For example, a business might stop operations due to a flood or extended power outage and sustain loss of revenue. 

Plus, business interruption insurance could also protect a business against loss of income if a breach of contract dispute occurs. When this happens, it can lead to business operations stopping.

Summary

Having certain insurance policies in place will help reduce the possibility of consequential loss exposure. This is why it’s important to have a policy that covers damages from things like flooding, fire, and other natural disasters. 

Consequential loss insurance will cover indirect damages and it can also be known as business interruption insurance. It’s a great way to have some added peace of mind should any unforeseen or unpredictable events cause a disruption to business operations.