What is a 'Consequential Loss'
A consequential loss is the amount of loss incurred as a result of being unable to use business property or equipment. If the property/equipment is damaged through a natural disaster or accident, only certain types of insurance can cover the owner for lost business income. Direct damages are covered under different types of insurance, such as property/casual or fire insurance, but the company still incurs the costs of lost operations since consequential losses are considered an indirect loss and may not be covered.
BREAKING DOWN 'Consequential Loss'A business may consider any loss that indirectly incurred due to damage of physical property or an inability to operate resulting from physical damage that directly affects the business’ ability to operate regardless of ownership as a consequential loss. This can include the need to pay key employees to maintain their involvement in the business and recurring obligations that must be met regardless of profitability.
For example, a tornado destroyed a Goodwill store in June 2015 located in Portland, Michigan. While the physical structure and the store’s inventory are covered under various forms of property insurance, the loss of business revenue from the closure, which lasted until June 2016, is not covered under that policy. Losses related to the revenue are considered consequential and need separate coverage. The available property insurance is able to replace the physical facility, allowing the business to rebuild within the same location.
Insurance for Consequential Losses
Consequential losses are traditionally covered through a separate insurance policy identified as business interruption insurance or consequential loss insurance. Insurance policies of this nature are designed to compensate for consequential losses regardless of the presence of physical damage to the facilities or equipment owned and operated as part of the business. For example, business interruption insurance can also cover situations that result when the loss of revenue occurs because of things such as an extended power outage or a breach of contract from a supplier or business partner that led a business to cease operations temporarily.
Though insurance may be available for a variety of situations, only certain forms of insurance are required. Many businesses may choose to hold general liability insurance policies to protect themselves from costs relating to accidents, injuries or negligence, as well as product liability or professional liability for those operating in the goods or service sectors, respectively. Business interruption insurance is considered peril-specific and must often be requested separately.