What role do "consequential losses" play in business insurance?

Consequential losses are critical in business insurance because they represent the indirect losses that a business suffers as a result of a direct loss addressed by an insurance policy. For instance, if a fire damages a building, the direct loss would include the cost of repairs, but the consequential losses could include lost profits while the business is unable to operate, increased operating expenses, or other financial impacts stemming from the incident. These losses are significant because they can drastically affect the overall financial health of the business.

In the context of insurance, understanding consequential losses helps both business owners and insurers evaluate the full scope of potential damages that could be associated with an insured peril. This understanding enables the business to select appropriate coverage that not only protects against direct losses but also mitigates the risks associated with these consequential impacts as they can be substantial and long-lasting. Therefore, recognizing the potential for consequential losses is essential when assessing risk and planning for adequate insurance coverage.