Consequential Loss

Consequential loss insurance protects businesses against the financial impact that follows physical damage to insured property. While material damage insurance covers the cost of repairing or replacing the asset, consequential loss insurance covers the income stream that is disrupted while the business recovers. In India, this cover is formally known as the Loss of Profits (LoP) policy and is always attached to an underlying fire or all-risks material damage policy.

Under IRDAI regulations, the consequential loss policy must mirror the perils covered by the material damage policy. If fire is an insured peril under the property policy, then business interruption caused by fire-related material damage will trigger the LoP policy. The indemnity period, which is the maximum duration for which the insurer will pay, is chosen by the insured at inception and typically ranges from 12 to 36 months for Indian commercial risks.

The key components of a consequential loss claim in India include the reduction in gross profit (turnover minus variable expenses), the standing charges that continue during the interruption period (rent, salaries, loan repayments), and the increased cost of working incurred to minimise the interruption. Indian businesses must maintain detailed financial records, as the loss adjuster will calculate the claim based on audited accounts and projected turnover trends.

Consequential loss policies are particularly critical for Indian manufacturing and IT services firms where even a brief shutdown can result in lost contracts, penalty clauses with buyers, and reputational damage. The Bombay High Court and other Indian courts have examined consequential loss claims extensively, reinforcing that the material damage proviso must be satisfied before any LoP claim is admissible.