What is a consequential loss?

A consequential loss refers to an indirect loss that arises as a result of an insured peril. This type of loss is not directly linked to the physical damage or destruction of property but occurs as a consequence of that loss. For example, if a fire damages a business, the business may suffer a consequential loss due to lost income while the business is closed for repairs.

In understanding consequential losses, it is important to differentiate them from direct losses. Direct losses involve the immediate damage to property, whereas consequential losses involve secondary effects that stem from that damage. This understanding is crucial when assessing coverage under insurance policies, as not all policies automatically cover consequential losses; specific endorsements may be needed.

Recognizing the characteristics of consequential losses is essential for determining the full impact of an insured event on an individual or business.