Alabama Property and Casualty Practice Exam

Which of the following is the best example of an indirect loss?

1. Sequential loss

2. Liability loss

3. Employee theft

4. Loss of use

The correct answer is: Loss of use

An indirect loss refers to a loss that occurs as a consequence of a direct loss, rather than resulting from an event itself. This type of loss is not the immediate financial damage to a property but rather the subsequent financial impact that arises from the inability to use that property. The concept of "loss of use" aligns perfectly with this definition; it captures the economic impact suffered by an insured property owner after a direct loss has occurred. For example, if a business experiences a fire that damages its premises (direct loss), the business might subsequently face a loss of income because it can't operate during the repairs. This scenario clearly demonstrates how the loss of use represents an indirect consequence stemming from the initial damage. In contrast, other provided options do not fit into the category of indirect losses. Sequential loss, while it implies a chain of events following an initial loss, may not directly relate to the loss of use aspect. Liability loss refers to situations where one party holds responsibility for causing damage or injury to another, which is also a direct liability rather than an indirect consequence. Employee theft typically represents a direct loss to the employer, as it describes the immediate negative impact of lost assets or funds, rather than the broader economic effects that may follow. Thus, loss of use