What are indirect losses in insurance?

Indirect losses in insurance refer to consequential losses that occur as a result of a primary loss. When a direct loss happens, such as damage to property caused by a fire, there can often be additional financial implications beyond the immediate cost of repairing or replacing the damaged property. These additional costs might include lost income due to business interruption, ongoing expenses that continue while repairs are made, or other financial effects that stem from the initial event.

Understanding this concept is essential for property and casualty insurance because it highlights the broader financial impacts of an event beyond just the physical damages. Insurers and policyholders must consider both direct and indirect losses when assessing risk and evaluating coverage needs. By recognizing that indirect losses can significantly escalate costs associated with a primary loss, policyholders can better structure their insurance policies to ensure they are adequately covered, particularly for businesses that may suffer from lost revenue during recovery periods.