Consequential Loss: What Is It?
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A consequential loss is an unfavorable outcome brought on by harm to equipment or property employed in business. A business owner can get insurance to cover any damages to equipment and property, as well as secondary losses. The owner will receive compensation through a consequential loss insurance or clause for this lost business revenue.
Business interruption or business income insurance are other names for this particular policy.
- Property damage’s indirect effects are consequential losses.
- These must be covered by insurance that is separate from the coverage for physical damage to buildings or equipment.
- These plans cover losses brought on by interruptions in business.
Casualty insurance is frequently purchased by business owners to cover any losses resulting from theft, fire, flood, or other natural disasters to their buildings or equipment. These direct coverage policies, however, do not reimburse the owner for money lost because the company was unable to use that property or equipment.
Consequential losses might include indirect losses caused by physical damage that negatively impact everyday business operations. Compensation for ongoing responsibilities like salary and fixed operational costs may be included in the coverage of consequential losses.
As a result, insurers make a distinction between two categories of loss: primary or direct loss, such as fire-related destruction, and secondary or consequential loss, such as business interruption brought on by the fire.
Important: Income losses are consequential and need for separate insurance, with consequential loss insurance paying the insured for expenses incurred by destroyed facilities or equipment.
An illustration of consequential loss insurance
Say a tornado decimated a Goodwill store in Portland, Michigan, years ago. Property insurance for the organization paid for the physical damage and loss of the store’s goods, while a second policy paid for the revenue lost as a result of the store’s temporary closure.
Income-related losses are consequential and necessitate special insurance.
Consequential Losses Insurance Policies
Consequential losses are covered by business interruption insurance, sometimes referred to as business income insurance. These insurance, regardless of material damage to the property or equipment, compensate a firm for lost revenue following a catastrophic catastrophe.
A loss of income brought on by occurrences like a prolonged power outage, a flood, or a mudslide may be covered by business interruption insurance. A disagreement over a violation of contract that results in a temporary suspension of operation, such as one with a supplier or other third party, may also be covered by business interruption insurance.
Peril-specific business interruption insurance is frequently required to be obtained individually.
Insurance companies are looking for claims that suggest too optimistic expectations. For instance, a bakery that had to close for repairs following a fire can submit a claim for compensation for a reasonable amount of lost sales, but not for losses that were significantly more than typical.
Additionally, even though there are different kinds of insurance available, only some are necessary. Many companies may carry general liability insurance to guard against costs associated with mishaps, injuries, or negligence.
What Is a Consequential Loss Example?
An illustration would be a store that has to close due to flooding. However, it is unlikely that the company’s property insurance will pay for consequential losses, or the money lost because the shop had to be closed while everything was fixed and brought back up and running. The company’s property insurance will pay to fix the damaged building and equipment. The proprietor of the shop must obtain a separate, particular sort of insurance for these specific damages.
What Distinguishes Direct Loss from Consequential Loss?
Fire devastation is one example of a direct loss, whereas consequential loss is the indirect result of those damages. In other words, the building and equipment would sustain damage, and the losses brought on by the company having to stay closed would constitute the consequential loss.
What Kind of Insurance Pays for Consequential Losses?
Casualty, property, and other types of insurance typically do not cover consequential losses. It is frequently essential to get a certain insurance policy known as business interruption insurance or business income insurance in order to obtain this type of coverage.
How Much Can Business Interruption Insurance Pay Out?
According to your policy, yes. Most policies contain a coverage limit, which states that the insurer will only pay for a certain number of losses.
The Bottom Line
Because “indirect or consequential” damages can be exceedingly big and expensive to cover, standard insurance plans frequently include terms restricting liability for such losses. This is something that business owners should be aware of and think about doing in order to increase their protection against consequential loss.
It is important to not undervalue the effects of having to close for several weeks or even months. Regardless of how infrequently floods, fires, or other freak disasters happen, a loss of this magnitude might render organizations bankrupt when coupled with ongoing costs like employee pay. For this reason, business interruption insurance is a need.