Property and Casualty Insurance Practice Exam

Which of the following is an example of a direct loss?

1. Loss of rental income due to property damage

2. Repair costs after water damage to a building

3. Increased expenses due to a delay in construction

4. The decline in property value over time

The correct answer is: Repair costs after water damage to a building

A direct loss refers to a loss that results directly from an event or peril that causes physical damage to property. In this context, the loss is immediate and quantifiable, typically involving the cost of repairing or replacing damaged property. Repair costs after water damage to a building exemplify a direct loss because these costs arise directly from the physical damage caused by the water incident. The expenses incurred to restore the property to its pre-damaged condition are a direct reflection of the damage sustained, making them a straightforward example of a direct loss. In contrast, the loss of rental income, increased expenses due to construction delays, and the decline in property value over time are all examples of indirect or consequential losses. These losses stem from the initial damage but do not directly involve the cost to repair the physical property itself. They represent impacts on financial operations or value rather than expenses directly tied to the physical loss, which is why those options do not fit the definition of a direct loss.