What type of loss occurs when a business is damaged by a fire and suffers loss of income?

When a business experiences damage from a fire, the loss of income that follows is categorized as an indirect or consequential loss. This type of loss occurs because the fire does not just damage physical assets, such as buildings or equipment, but also affects the business's ability to generate revenue during the period it cannot operate normally.

Indirect or consequential losses are not due to a direct physical damage to property; instead, they arise as a result of that damage. In this instance, while the fire directly destroys parts of the business, the income loss is a consequence of that destruction and the subsequent inability to conduct operations.

Understanding this distinction is crucial because insurance policies often cover different types of losses in varying ways. Direct loss would involve costs associated with repairing or replacing the damaged property, while indirect loss—such as lost profits—may require additional coverage, such as business interruption insurance. This is why recognizing the nature of income loss as indirect or consequential is important for both insurance and business recovery planning.