A consequential loss is a loss sustained by a business when it is unable to use its assets in the capacity for which they were intended. A consequential loss typically arises as the result of damage caused by a natural disaster, such as flooding or an earthquake.
If a business has insurance coverage that pays it for consequential losses, it can recover some portion of the amount of these losses, but usually not the full amount. If there is no such insurance coverage, a company must absorb the full amount of these losses.
As an example of a consequential loss, a manufacturing firm is completely shut down by a devastating flood. The company's property insurance will reimburse it for damage to the facility and equipment; however, the consequential losses stemming from being out of operation during the recovery period will not be covered by the property insurance. Instead, the company's risk manager must acquire insurance that specifically provides coverage for the consequential losses related to the flood.
Insurance that provides coverage for consequential losses may provide more broad-ranging coverage than simply losses stemming from damaged fixed assets. The coverage might also extend into losses from the loss of utilities, from supply chain disruptions, and similar factors. The insurance policy designed to deal with consequential losses is business interruption insurance.
A consequential loss is a type of indirect loss.