California Property & Casualty Broker-AgentGeneral InsuranceMedium
A business owner purchases a commercial property policy that covers direct physical loss or damage to their building and its contents. The policy also includes coverage for loss of income if the business cannot operate due to a covered peril. The loss of income coverage is an example of:
- AConsequential loss coverage
- BReplacement cost coverage
- CSpecified peril coverage
- DDirect loss coverage
Show answer & explanationAnswer & explanation
Correct answer: A. Consequential loss coverage
Loss of income is a consequential (or indirect) loss because it is a financial loss that occurs as a result of a direct physical loss (like fire damage to the building). Direct loss is the immediate physical damage.
Why the other options are wrong
- B. Replacement cost coverage is a valuation method for direct losses, not a type of loss coverage.
- C. Specified peril coverage refers to a policy that lists the specific perils covered, not the type of loss itself.
- D. Direct loss coverage would be for the physical damage to the building itself.
Consequential Loss (Indirect Loss)
A financial loss that occurs as a result of a direct physical loss, but is not the direct physical damage itself. Examples include loss of income, extra expenses, or loss of use.
- Follows a direct loss.
- Often business interruption or loss of rents.
- Requires specific coverage in the policy.
- Can sometimes exceed the direct loss amount.
Memory trick: Direct is FIRST, Consequential FOLLOWS.