How are direct and indirect losses related?

• A. Direct losses can cause indirect losses
• B. Indirect losses cause direct losses
• C. Direct losses and indirect losses are unrelated
• D. Indirect losses always exceed direct losses

Answer: (A)

Direct losses can cause indirect losses. The immediate damage from a peril—such as a fire damaging a building or stock—constitutes the direct loss. The interruption this damage creates, like lost business income, extra expenses to keep operations going, or costs to relocate, is the indirect loss. The direct damage creates the situation that leads to these follow‑on costs, so indirect losses arise as a consequence of the direct loss. Indirect losses don’t typically cause the direct damage, and they’re not guaranteed to be larger than the direct loss—amounts vary.