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An indirect loss is secondary financial damage incurred as a consequence of a named peril like fire or flooding. This contrasts with a direct loss caused by the insured peril. In an example, a veterinary clinic might be damaged in a flood, which is a form of direct loss. This would require the clinic to close for repairs, which causes an indirect loss because it doesn’t earn any income during the closure. Some insurance companies use the term “time element loss” to refer to these kinds of damages.
Insurance companies typically do not cover indirect loss without an additional policy or rider in place. Policyholders can file claims for direct losses as long as a peril is named on a policy and the circumstances don’t violate the terms of the contract. Any indirect losses are their responsibility, unless the contract explicitly states otherwise. This can be an important consideration for business owners buying insurance, who may want to purchase additional indirect loss coverage to make sure they will be protected from lost income caused by unexpected events.
A policy offering additional indirect loss protection can be more expensive. It may be possible to negotiate discount pricing on the basis of a package or special offer. Customers can request quotes from multiple providers to get an impression of available policies, options, and pricing. Having this information can also be helpful in negotiations, as people may use it as leverage to ask for better rates or terms.
There is also a differentiation between an indirect loss and a business risk. If a restaurant closes temporarily to clean up after a fire, the lost income would be eligible for coverage because it’s associated with the fire. On the other hand, if an employee walkout temporarily shutters the establishment, it isn’t eligible for insurance coverage. Policyholders need to be able to prove that they lost income because of a specific insurance risk, not as a result of other circumstances.
Establishing an indirect loss can sometimes be challenging. In the example of a natural disaster, interruptions in power and fuel supplies can create a ripple effect for businesses that rely on them. Repairing distribution centers is a direct loss, but it may be harder to determine where other responsibilities lie. In calculations of damage associated with natural disasters and other events, careful formulas may be used to determine the root causes of lost income and other costs, to make sure they are accurately counted.
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