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What is a Consequential Loss?
Malcolm Tatum
Malcolm Tatum
A consequential loss is a type of loss that comes about when circumstances beyond the control of the business owner make it impossible to use company equipment or company property to conduct the normal operations of that business. Typically, losses of this type are considered indirect, in that they may come about due to the occurrence of other events that resulted in some type of damage and indirectly prevented the owner from pursuing his or her normal course of business. While most types of direct damage are covered in various types of business and property insurance, indirect or consequential loss is typically only covered under specialized policies such as business interruption insurance.
A number of situations can lead to consequential loss. One common example would be a power outage that made it impossible for a retail store to remain open during its usual hours of operation. An indirect impact of that outage is that the store experiences a loss of revenue due to the necessity of closing until the power supply is restored and the store can open once again.
Another situation in which consequential loss may develop is in the case of a breach of contract. Should a vendor fail to deliver goods or services according to the provisions of the contractual agreement that exists between the vendor and the client, this may in turn affect the ability of that client to adequately service his or her customers. This indirectly leads to a loss of revenue that is likely to continue until the vendor does deliver the products promised, or the client obtains similar products from a new vendor.
There are also instances where some type of direct damage occurs that in turn triggers some type of consequential loss. A natural disaster such as a flood or fire would create a great deal of property damage. This direct damage would be covered under flood or fire insurance, allowing the business to repair the interior and exterior of the damaged building or buildings. The disaster insurance would not extend to compensating the business owner for the revenue lost while those repairs were made. In order to cover the consequential damage that resulted from the temporary closure of the business operation, business interruption insurance would allow the owner to file a claim for the approximate amount of revenue that would have been generated if the disaster had never taken place.
While insurance to cover incidences of consequential loss can be somewhat expensive, the coverage can provide a great deal of comfort to business owners. By replacing income lost as a result of some event outside the control of the business, the company is better positioned to overcome the adverse conditions and move forward. Many businesses find that even if the business interruption coverage is only used once every couple of decades, that one instance more than offsets the cost of the premiums paid over the years.
Malcolm Tatum
After many years in the teleconferencing industry, Michael decided to embrace his passion for trivia, research, and writing by becoming a full-time freelance writer. Since then, he has contributed articles to a variety of print and online publications, including WiseGEEK, and his work has also appeared in poetry collections, devotional anthologies, and several newspapers. Malcolm’s other interests include collecting vinyl records, minor league baseball, and cycling.
Learn more...
Malcolm Tatum
After many years in the teleconferencing industry, Michael decided to embrace his passion for trivia, research, and writing by becoming a full-time freelance writer. Since then, he has contributed articles to a variety of print and online publications, including WiseGEEK, and his work has also appeared in poetry collections, devotional anthologies, and several newspapers. Malcolm’s other interests include collecting vinyl records, minor league baseball, and cycling.
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![While insurance to cover incidences of consequential loss can be somewhat expensive, the coverage can provide a great deal of comfort to business owners.]()
By: corepicsWhile insurance to cover incidences of consequential loss can be somewhat expensive, the coverage can provide a great deal of comfort to business owners. -
![Consequential losses typically indirectly prevents a business from continuing operation.]()
By: Leonard ZhukovskyConsequential losses typically indirectly prevents a business from continuing operation. -
![A wildfire would be considered a consequential loss to a farmer.]()
By: kristo74A wildfire would be considered a consequential loss to a farmer.
Discussion Comments
Can independent contractors carry worker's comp insurance?
Why is it a problem if there is consequential loss because of a breach of contract by a supplier?
Aren't liabilities drafted into the agreement between the supplier and the buyer? If one party doesn't agree to the agreement, I'm sure that the other party would have the right to take them to court and have them pay for all of the losses. Of course, no one would want to go through the court process if they don't have to.
But it's better than not having insurance and having a storm wipe out your entire production facility.
I would also recommend people to take some action themselves to prevent consequential loss, like buying the necessary equipment to protect business equipment from power cuts and the like.
My best friend has an IT store and a couple of years ago, there was a power cut that not only caused damage to his equipment, but he lost some earnings because he could not operate. Unfortunately, he did not have any insurance for consequential loss. He tried to take the power supplier to court but failed. Apparently, the company supplying the power was not liable because it doesn't guarantee power at all times.
So at the end of the day, he could not get back any of his losses. But if had some sort of a protective equipment for power cuts and surges, he would have saved himself all this headache.
Most businesses don't realize how much damage and loss they will have to put up with after a natural disaster. The big industries generally have consequential loss insurance, but there were many articles about the small businesses which were at risk for bankruptcy after the last hurricane for example, because they were not prepared.
I read one article recently about how businesses that have loans from banks are generally under cover for things like fires because the banks actually require them to do so. And some small business owners think that consequential loss will mainly be the equipment that will have to be re-bought.
That's true, equipment can be the main factor if the business only remains closed for a matter of days or weeks. But what if it remains closed for months or years? Then, the loss of not running operations is going to become huge. On top of that, you have to think about wages of employees and such.
I actually understand what the small business owner is thinking. If I had a small business, paying for insurance every month or every year would seem like an unnecessary expense. I could probably use that money to better benefit the business. But that's exactly the kind of thinking that small business owners need to get away from.
I think small business experience more losses than bigger businesses. Big businesses tend to have many investors and additional investments in stock bonds for example, that a small business is unlikely to have. So when something like consequential loss takes place, or the business starts operating at a loss, how is it going to back itself up? That's a huge risk to take.
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