If an insured peril is the proximate cause of a loss, what type of loss is it?

• A. Indirect
• B. Direct
• C. Consequential
• D. Speculative

Answer: (B)

When the peril that starts the chain of events directly causes physical damage to the insured property, the loss is considered direct. The proximate cause is the immediate event that results in the damage, so the insurance payout applies to the actual property damage itself. Indirect losses are the results that flow from that damage, like business interruption or extra expenses, but they’re not the initial physical damage. Consequential losses are another term sometimes used for those indirect effects, still not the direct damage. Speculative losses involve potential gains and are not covered under standard policies. Example: a fire damages a building—the fire is the proximate cause, and the direct loss is the physical damage to the building. The loss of income during repairs would be an indirect (consequential) loss.