An insured's business is damaged because of a fire, and he is forced to close temporarily for repairs. As a result, the insured lost income. What type of loss is this?

• A. Indirect or Consequential
• B. Direct
• C. Physical
• D. Global

Answer: (A)

The main idea is distinguishing direct versus indirect losses in property insurance. A fire can cause direct physical damage to the insured property—think walls, equipment, or inventory that are actually burned or ruined. But the fact that the business must close for repairs and loses income is the financial impact that flows from that direct damage. That is an indirect (or consequential) loss, because it arises as a result of the direct damage, not from the damage to the property itself. Insurance often has coverage specifically for this kind of loss, known as business income or business interruption coverage, which helps replace the income and cover continuing expenses during the period of restoration. The other options wouldn’t fit as well: the direct or physical loss describes the actual destroyed property, not the lost earnings; and global isn’t a term used to describe loss types in this context.