Canadian Accredited Insurance Broker (CAIB) One Practice Exam

How does a direct loss differ from an indirect loss?

1. Direct loss results from human error

2. Direct loss is due to a perceived risk

3. Direct loss occurs when a peril attacks the object of insurance

4. Direct loss covers subsequent damages

The correct answer is: Direct loss occurs when a peril attacks the object of insurance

The distinction between direct and indirect loss is crucial in insurance and risk management. A direct loss is defined as damage that occurs directly as a result of a specific peril impacting the insured object. For instance, if a fire causes damage to a building, that damage is considered a direct loss because it was the fire (the peril) that directly affected the building (the object of insurance). In contrast, indirect loss, also known as consequential loss, refers to the secondary effects that result from a direct loss. For example, if that same building suffers fire damage and subsequently, the business within it loses income due to its inability to operate, the loss of income represents an indirect loss. Therefore, the correct answer highlights the cause-and-effect relationship inherent in direct loss, which is characterized by the immediate impact of a peril on the insured property.