South Carolina Personal Lines Practice Exam

How is an indirect loss defined in insurance?

1. A loss directly covered by the policy

2. A consequence of direct loss, excluding proximate cause

3. A loss that does not occur at the time of the event

4. A type of loss that is always compensable

The correct answer is: A consequence of direct loss, excluding proximate cause

An indirect loss in insurance refers to a loss that occurs as a consequence of a direct loss but is not the initial event that caused the damage. This means that when a property is damaged (the direct loss), the resulting financial impact, such as loss of income or additional expenses incurred while the property is being repaired, constitutes an indirect loss. This type of loss unfolds as a result of the direct loss but is distinctly separate. Understanding the nature of indirect losses is crucial in insurance because they often present significant financial implications that may arise after the initial, direct loss event. For example, if a business experiences a fire (the direct loss) and then must close for repairs, the income lost during this downtime represents an indirect loss. Therefore, defining indirect loss as a consequence of direct loss helps clarify the different categories of losses that insurance policies cover.