Understanding Consequential Damages in insurance with examples

Understanding the nuances of certain insurance terminologies is crucial for a smooth claim settlement process. And Consequential Damages is one such terminology that you need to be well versed with. This terminology is not restricted to a particular type of insurance and has applications across several categories. Read ahead for a detailed explanation of Consequential Damages in insurance with the help of examples.

What are Consequential Damages in insurance?

Consequential Damages are those damages that arise due to a result of an action that may or may not be in your control. In most cases, the damage due to an accident might be covered by an insurance policy, but a Consequential Damage arising due to an avoidable action might not be covered.

Here’s an example. In car insurance, Consequential Damages are best understood with the example of a Hydrostatic Lock. Suppose you take your car out for a road trip during the rainy season. Unfortunately, it rains heavily, resulting in flooding. Your car is considerably submerged underwater. In such a situation, if you crank the engine, it can enter a hydrostatic lock and cause damage.

Here, the damages are usually attributed to the cranking of the engine and not flooding. Thus, even though damages due to flooding might be covered by your car insurance policy, damages due to cranking the car’s engine when submerged underwater will be termed as consequential loss and not covered unless there's an add-on cover or specified otherwise in the policy document.

Claims involving Consequential Damages

In the above section, engine damage is not a direct outcome of flooding. It is an indirect outcome caused by the cranking of the engine when submerged underwater, which could have been avoided. When it comes to claiming settlement, whether the action was initiated by mistake, by accident, or intentionally does not matter. What matters is whether the policy document covers such a scenario or not.

Before raising a claim, you can go through your policy document to check if certain losses are covered. If you are not sure, you can speak to the insurer’s Customer Support team and then move ahead with the claim.

If you are concerned about specific instances, you can purchase add-on covers that might cover those scenarios while buying or renewing your policy. For example, purchasing an Engine Protect Add-on along with a Comprehensive Car Insurance Policy can cover Hydrostatic Lock.

Consequential Damages across insurance categories

Here are some Consequential Damages examples across vehicle insurance, travel insurance, mobile insurance, and property insurance.

Example of Consequential Damages in vehicle insurance     

Suppose you park your two-wheeler or a four-wheeler on the street and enter a movie theatre. After watching the movie, you come out of the theatre and find out that your vehicle has been towed, as it was parked in the No Parking zone.

Unfortunately, you find out the vehicle has been damaged during the towing process. This will be termed as Consequential Damage in car insurance and bike insurance. In most cases, you won’t be able to raise a claim in this situation as you were in violation of the law by parking the vehicle in a No Parking zone.

Example of Consequential Damages in travel insurance

Suppose you are about to fly from Mumbai to Chicago to close a time-sensitive, million-dollar business deal. Unfortunately, you fail to catch your flight from Mumbai. You have to wait a day to catch the next flight. However, before the next flight, you are informed that the deal has been cancelled and has been given to a competitor due to your absence. You lose your prospective, million-dollar deal.

In this scenario, your travel insurance claim for the missed flight will be approved. But you cannot raise a claim for the million-dollar deal, as it was a Consequential Loss/Damage.

Example of Consequential Damages in property insurance

Suppose you have a warehouse, and it is insured under property insurance. Unfortunately, the goods in the warehouse are damaged due to a hurricane.

Here, you will be compensated for the loss of goods as per the policy’s terms and conditions. However, you won’t be compensated for the loss of business arising due to the loss of goods, as the loss of business would be a Consequential Loss/Damage.

Key takeaways

Here are three key takeaways from this article

• Consequential Damage/Loss often occurs due to an indirect event for which there’s no insurance cover.

• Most claims for Consequential Damage/Loss will be rejected.

• In some cases, it might be possible to strengthen your insurance policy with relevant add-ons to cover some Consequential Damage/Loss.

Frequently Asked Questions (FAQs)

This section deals with some common questions and answers associated with Consequential Damage and Consequential Loss across different insurance categories.

Is the meaning of Consequential Damage and Consequential Loss the same or different?

Usually, Consequential Damage and Consequential Loss mean the same thing in insurance unless specified otherwise. They are often used interchangeably as per the scenarios.

Does buying car insurance online cover Consequential Damages?

Buying car insurance online can cover Consequential Damages such as Hydrostatic Lock if you have purchased the appropriate cover. For example, buying a Comprehensive Car Insurance Policy and an Engine Protect Add-on can prove helpful. Please read the terms and conditions carefully before buying any insurance policy.

Are Consequential Damages and Consequential Losses covered in a Third-party Liability Two-wheeler Insurance Policy?

As a Third-party Liability Policy does not cover damages to the insured vehicle, it will not cover related Consequential Damages and Consequential Losses.

Where can I find the list of Consequential Damages and Consequential Losses that are not covered by an insurance company?

There are countless scenarios when it comes to Consequential Damages and Consequential Losses. Therefore, they cannot be listed. However, if your policy covers any Consequential Damages and Consequential Losses, such instances shall be mentioned in the policy document.

What is the best practice when it comes to Consequential Damages and Consequential Losses?

It is suggested to go through the features of the insurance policy before buying it and check the policy document for Consequential Damages and Consequential Losses coverage before raising a claim.

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