Texas General Lines — Property and CasualtyProperty and Casualty Insurance BasicsMedium
A restaurant owner experiences a fire that damages both the building and the business's custom-built pizza oven. The fire is a direct cause of the damage to both, but the restaurant must close for two months for repairs, resulting in lost income. The lost income is considered what type of loss?
- AExcluded loss
- BDirect loss
- CConsequential loss
- DSalvage loss
Show answer & explanationAnswer & explanation
Correct answer: C. Consequential loss
Lost income resulting from property damage is considered a consequential loss, also known as an indirect loss. It is a financial loss that occurs as a result of the direct physical damage but is not the direct physical damage itself.
Why the other options are wrong
- A. An excluded loss would be one specifically not covered by the policy.
- B. Direct loss refers to the immediate physical damage to property, like the damaged building and oven.
- D. Salvage loss refers to the value of damaged property that can be recovered or sold.
Indirect Loss (Consequential)
A loss that is a result or consequence of a direct loss, such as loss of income due to a business interruption after a fire.
- Follows a direct loss.
- Often financial in nature (e.g., lost profits, extra expenses).
- Requires specific coverage (e.g., Business Income insurance).
Memory trick: Direct hits, Indirect ripples.