What is consequential loss in insurance?

When something terrible happens to your property, like a fire or flood, it can mean you can’t use that property anymore. Maybe it’s a store where you sell things or a factory where you make stuff. You lose money if your business has to shut down because of this damage. Even if insurance pays to fix the property, you still lose money daily if you can’t open it.

This is called “consequential loss”. It’s money you lose due to the damage, not the damage itself. Your standard property insurance usually won’t pay for this kind of loss. It only covers the cost of repairing the actual damage.

How do you protect against consequential loss?

To protect your business from consequential loss, you need a special kind of insurance called “business interruption insurance.” This insurance pays you to compensate for your loss while your business is closed.

What does business interruption insurance cover?

Business interruption insurance can cover a bunch of things:

• The profits you would have made if your business was open
• Money to pay your employees even though they can’t work
• Rent you have to pay even though you can’t use your space
• Taxes, loan payments, and other costs don’t stop just because your business did
• Moving to a temporary location so you can reopen faster

Basically, it tries to put you back in the same money situation you would have been in if the damage never happened.

How much business interruption insurance do you need?

Figuring out how much business interruption coverage to get can be tricky. You have to think about the worst case scenario. How long would it take to rebuild and reopen if your whole business was destroyed? You want enough insurance to cover you for that whole time.

You also have to be really clear with the insurance company about what costs you need covered. Don’t assume something is included. Make a detailed plan and discuss it with them. An insurance agent who specializes in businesses like yours can help a lot with this.

The claims process for consequential loss

Making a claim for consequential loss can be more complicated than a regular property damage claim. You have to prove how much money you’re losing. The insurance company will want to see things like:

• Financial records showing your profits before the damage
• Receipts for ongoing expenses like rent and payroll
• Detailed plans for rebuilding and reopening
• Proof that you’re doing everything you can to minimize the interruption

They might also send an adjuster to inspect the damage and your rebuilding progress. The more organized your records are, the smoother the claims process will go. Having a good relationship with your insurance agent helps a lot too.

Pitfalls to watch out for

There are some common problems that can come up with consequential loss claims. One is coinsurance. A lot of business interruption policies have a coinsurance clause. This means you have to insure a certain percentage, usually 80%, of your business income. If you don’t, they’ll reduce your payout by the same percentage you’re underinsured.

Another issue is the time limit. Most policies only pay for a set amount of time, often 12 months. If it takes longer than that to reopen, you’re out of luck. You can sometimes buy extended coverage for an extra cost.

You also have to watch out for exclusions. Consequential loss coverage often excludes things like utility failures, undocumented income, and losses from partial closures. You have to read your policy really carefully to know what’s not covered.

Real life examples of consequential loss

One famous example of consequential loss was after the 9/11 attacks in New York City. Lots of businesses near Ground Zero were damaged or destroyed. But even more couldn’t open because the area was closed off. They lost huge amounts of money and many had to shut down permanently.

Another example is the 2011 flooding in Thailand. The floods shut down a bunch of factories that made computer hard drives. This caused a worldwide shortage of hard drives and drove prices way up. Companies that needed hard drives for their products lost a ton of sales.

In 2020, the COVID-19 pandemic caused consequential losses for all kinds of businesses. Restaurants, gyms, theaters and lots of others had to close their doors for safety reasons. Business interruption insurance helped some of them survive. But a lot of policies don’t cover losses from pandemics. This led to a bunch of lawsuits over what should be covered.