A consequential loss clause provides protection to a business or owner should they experience loss of income, resulting from things such as theft, fire, floods and other natural disasters. Essentially, the consequential loss results from the inability to use certain things needed to operate the business; consequently, that inability results in losses for the business.

As nearly all businesses can suffer consequential losses, understanding that your direct insurance policy will not cover loss of income or inability to fully operate your business. Typically, these types of insurance policies are called, “business interruption insurance”, or, “business income insurance”, and generally covers the timeframe in which the catastrophic event occurred until such time as normal business operations are able to commence. As one never knows when it may be necessary, it can be of great value to purchase a supplemental insurance policy that will cover those consequential losses, should they arise. Examples of times in which you may need coverage for consequential losses, include:

  • Paying salaries to your employees (and, to yourself)
  • Honoring payments to vendors
  • General operating expenses, while you get your business back into a place of profitability

It is also worth noting that business insurance, in addition to covering instances of physical damage that affects operations, can also offer protection for the company in the event of a breach of contract by a third party, such as a vendor or contractor, which then results in a loss of income.

Do Not Exclude Consequential Damages

In the event of a breach of contract, you (as a business owner, or otherwise nonbreaching party) will want to ensure that you will be covered for any consequential losses that your business may endure. Generally speaking, for you to be awarded any damages for consequential loss, without such a clause in the contract or the ownership of such an insurance policy, the losses must be reasonably seen as the result of the breach of contract. Otherwise, you may not be able to receive compensation for any consequential losses (or, damages) that you suffer as a result of that breach of contract.

There are different types of damages that may be involved, so it is important to understand which is which, should you ever find yourself in the position of having to seek compensation for damages. Damages include:

  • Direct damages or general damages. Direct damages are those that are the easiest to spot, as they are the damages that are most reasonably seen to have resulted from the breach of contract.
  • Incidental damages. These damages result in additional expenses that are incurred by the nonbreaching party, as a result of the breach of contract.
  • Consequential damages. Also referred to as, “special damages”, these are neither direct or incidental damages, and include any damages that are addressed in the breach of contract.

Understanding the different types of damages or losses that exist can help you ensure that all eventualities are being met both in your contracts and in your insurance policies.

While many contracts may include a clause regarding consequential losses, the clauses do need to be within reason as to what the breaching party may be responsible for, in terms of providing compensation. For example, just because the painter whom you may have hired to repaint your office doesn’t complete the job, it does not necessarily negatively impact your ability to operate your business. Therefore, the painter cannot be reasonably expected to provide you compensation for consequential losses.

Additional Considerations

In addition to the types of damages that exist, and the various scenarios for which you want to ensure you are covered, it is also important to know those times in which certain clauses may be included or excluded.

Often times, in commercial real estate, one party may insist that the contract has a consequential loss exclusion clause. In the situation, the other party will want to determine if there are certain exceptions that should be made regarding that clause. It also not uncommon for those types of exclusion clauses to exist within construction contracts. After all, a contractor may not want to be, “on the hook” for new apartment building not being able to open, thus resulting in loss of income for the landlord, because of inclement weather hindering the contractor’s ability to complete the job on time.

If you need help with consequential loss clauses, you can post your legal need on UpCounsel’s marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Stripe, and Twilio.