South Carolina Personal Lines Practice Exam

An insured's closure due to a fire leading to lost revenue falls under which category?

1. Direct loss

2. Physical damage

3. Indirect loss

4. Immaterial loss

The correct answer is: Indirect loss

The correct categorization of the insured's closure due to a fire leading to lost revenue is classified as an indirect loss. Indirect loss refers to financial losses that occur as a consequence of a direct loss. In this scenario, the direct loss would be the physical damage caused by the fire to the property itself. However, the shutdown of business operations and the resulting lost revenue do not stem from the physical destruction of assets but rather from the aftermath of that destruction. Indirect losses can include costs such as loss of income, ongoing expenses that continue while the business is not operational, or additional expenses incurred to resume normal operations. This type of financial impact is significant in personal lines insurance, as it underscores the importance of business interruption or loss of income coverage in policies. While options like direct loss and physical damage refer specifically to tangible losses and damage to property, the concept of immaterial loss generally relates to non-tangible damages that do not have a direct financial impact or cover subjective elements. Thus, indirect loss is the precise category that encompasses the lost revenue experienced due to the fire's effects on business operations.