Types of Loss and their Causation

Back to: TelaClaims Adjuster I – Insurance Basics for Adjusting a Claim

Cause

Proximate Cause is when there is an unbroken chain of events between an occurrence and a loss.

an Occurrence is an event, incident, or condition that causes damage that ultimately leads to more damage this could be something like an electrical shortage causing a fire.

Using our example,  the original occurrence would be the electrical shortage then the fire department would have to put the fire out resulting in structural damage, fire damage, and water damage. The proximate cause of all the resulting damage would be the electrical shortage because it was the first even in the chain of events between the occurrence and the loss.

Determining the proximate cause of a loss is important because this can be used to determine which losses are actually covered by an insurance policy, this is because damages in most policies are covered if the damage was caused by a covered peril or if the proximate cause of loss was a covered peril.

Loss

A loss for the insurer is the actual amount that they had to pay out to settle the claim whether it be for property damage, injury, defense costs, etc.

A loss as it pertains to the insured refers to the financial loss due to an occurrence or accident, these losses can be classified as Direct or Indirect.

Direct Loss is defined as physical harm to tangible property. This could be things like structural damage, fire damage to kitchen walls, water damage to floors after using water to put out a fire, etc.

Indirect Losses are economic losses that occur as a result of a direct loss. This could be things like the cost of a hotel room while waiting for your home to be repaired, or losing rental income because a loss required a tenant to move out.

Let’s use a practical example to understand Direct and Indirect losses.

A massive fire destroys a grocery stores whole fleet of delivery trucks, in this example, the actual destruction of the delivery trucks would be the direct loss while the cost of renting new trucks to keep operations rolling would be the indirect loss.

Concurrent Losses are when something causes a loss that leads to another form of loss, let’s use a tropical storm as an example when a tropical storm hits a home and brings with it strong winds which cause damage to structures while the heavy rain causes flooding. The door leading into the warehouse lobby is blown open by high winds. Flood waters further damaged the floor of the front lobby.  It is impossible to separate the damage caused by the flood from the damage caused by wind. The building has a commercial property policy which covers damage from wind but excludes damage from floodwaters. Under concurrent causation, coverage benefits will be due to the policyholder.