What are Consequential Damages in Insurance? (With Examples)

There are 6 types of damages in insurance, they are incidental, compensatory, nominal, liquidated, punitive, and consequential damages. Today, we will discuss about the meaning of consequential damages in insurance and its examples.

What are Consequential Damages in Insurance?

A consequential loss or damage is a collateral damage occurring due to loss or damage to the insured object. Here, even though the insured object is covered, the policyholder will not be protected against the collateral damage as the insurance company did not provide coverage towards any collateral damage.

This concept can be slightly confusing but we will attempt to explain to you using simple examples so you understand the concept of consequential loss or damages.

Examples of consequential damages

Example of consequential damages in motor insurance

Let us assume that Mr. Sam bought a bike insurance policy for his motorbike. Now, Mr. Sam parked his bike in a no parking zone, causing it to be towed by the authorities. During the towing process, the tow truck driver was not careful while driving and caused damages to Mr. Sam’s bike. 

Now, even though Mr. Sam has a bike insurance policy that covers physical damages, he will not be covered by the insurance company as Mr. Sam parked in a no parking zone. It will be deemed as a consequential loss to Mr. Sam.

Example of consequential damages in travel insurance

Let us assume that Mr. Ricky is a businessman and travels often to other parts of the world for business deals. Mr. Ricky is a smart individual and always opts for travel insurance.

Let us further assume that one of Mr. Ricky’s flights got cancelled due to whatsoever reason, causing him financial loss due to him missing a business opportunity. Now, the insurance company will compensate Mr. Ricky for his air ticket cost, but it will not compensate him for the loss caused due to his missed business opportunity as it was consequential loss.

Example of consequential damages in property insurance

Let us assume that Mr. Jagmohan is a businessman having a factory. He has insured his factory against damages caused due to fire. Now, a few months after he bought his insurance policy, his factory met with a fire, causing the total loss of all of his machinery and inventory.

As his factory was covered against damages due to fire, Mr. Jagmohan will be compensated for the loss of his machinery and inventory. However, the collateral damage of this event will have fare reaching consequences, as Mr. Jagmohan will have to keep his factory closed for many months, halting production and thereby resulting in financial loss to his business. This consequential loss will not be covered by the insurance company.