State Farm Insurance License Practice Exam

Which of the following defines an Indirect Loss?

1. A loss resulting directly from physical damage

2. A loss unrelated to any primary damage

3. A loss that occurs as a consequence of a direct loss

4. A random occurrence without a preceding cause

The correct answer is: A loss that occurs as a consequence of a direct loss

An indirect loss refers specifically to losses that occur as a consequence of a direct loss. When a direct loss happens, such as damage to property, that event can lead to additional losses that are not immediately tangible or visible. For example, if a fire damages a business, the direct loss would be the cost to repair the building. An indirect loss would be the profits the business loses while it is closed for repairs. Thus, the connection between direct and indirect losses is grounded in their causal relationship; indirect losses stem from the repercussions of direct losses. The other definitions do not accurately capture the essence of an indirect loss. A loss resulting directly from physical damage pertains to direct losses. A loss unrelated to any primary damage does not fit the context of loss being categorized in relation to another loss. Lastly, a random occurrence without a preceding cause does not represent a loss type typically defined in the insurance context, as losses generally have identifiable causes or connections.