What is Consequential Loss
A consequential loss is an indirect loss resulting from an insured's inability to use business property or equipment. A business owner may purchase insurance to protect them against the secondary loss of property and equipment due to a natural disaster or accident. The consequential loss policy will compensate the owner for lost business income.
BREAKING DOWN Consequential Loss
To cover for direct loss, an owner may purchase property, fire, or casualty insurance. These direct coverage policies will not compensate the owner for lost income due to their inability to use their property or equipment. Indirect losses that are the result of physical damage and adversely affect normal business operations may be considered a consequential loss. Examples of consequential loss include continuing payment of salaries, fixed operational expenses, and other ongoing obligations, payable regardless of business profitability. All types of business can be affected by a consequential loss.
For example, a tornado destroyed a Portland, Michigan, Goodwill store in June 2015. Various forms of property insurance covered the physical structure and the store’s inventory, whereas separate coverage assisted with the loss of business revenue from the temporary closure, which lasted until June 2016. Losses relating to income are consequential and require separate coverage.
Insurance Protection for Consequential Losses
Business interruption insurance, also known as business income insurance, traditionally covers consequential losses. These policies compensate a business for loss of revenue after a catastrophic event regardless of the presence of physical damage to the property or equipment. Interruption insurance coverage will typically begin from the time of business interference and continues until the business returns to normal operation.
For example, business interruption insurance can cover situations that result when the loss of revenue occurs due to events such as an extended power outage, flood, or mudslide. The policy is helpful after a disaster during the time a business is rebuilding.
Business interruption insurance can also protect against loss of income during a breach of contract dispute with a third party (e.g., supplier) that led to a temporary cessation of business.
Though insurance may be available for a variety of situations, only certain types are required. Many businesses may hold general liability insurance policies to protect themselves from costs relating to accidents, injuries, or negligence. Business interruption insurance is peril-specific and often must be purchased separately.