South Carolina Personal Lines Practice Exam

What type of loss occurs when an insured's business is forced to close due to fire damage, resulting in lost income?

1. Direct loss

2. Indirect loss

3. Physical loss

4. Insured loss

The correct answer is: Indirect loss

The situation described relates to a business that suffers a loss of income due to having to close from fire damage. This scenario clearly illustrates an indirect loss. Indirect loss, also known as consequential loss, refers to the financial losses that arise as a consequence of a direct loss incident. In this case, while the fire damage is considered a direct loss because it physically damages the business property, the resulting lost income due to the business closure is classified as an indirect loss. This is because the income loss does not pertain to the physical damage itself but rather the secondary effects of that damage on the business operations. In contrast, direct loss would pertain solely to the physical damage to the property itself, while terms like physical loss and insured loss do not accurately categorize the income loss in this context, as those terms are not typically used to describe loss of income resulting from operational disruption. Indirect loss is specifically aimed at capturing this type of financial impact stemming from the initial damage.