Texas All Lines Adjuster Practice Test

What type of loss does indemnity insurance cover?

1. Liability losses solely

2. Only direct financial losses

3. Both direct and some indirect losses

4. Indirect losses only

The correct answer is: Both direct and some indirect losses

Indemnity insurance is designed to cover both direct and some indirect losses, which is why it is the correct answer. Direct losses usually refer to those losses that can be directly traced to an insurable event, such as damage to property resulting from a fire or theft. These losses have a clear and immediate impact. Indirect losses, on the other hand, can include costs that arise as a consequence of the direct loss. For example, if a business suffers damage to its property and as a result, experiences a loss of income while the property is being repaired, that loss of income would be considered an indirect loss. Indemnity insurance is intended to bring the insured back to the financial position they were in before the loss occurred, covering both types of losses to achieve this goal. This comprehensive coverage allows policyholders to receive compensation for various types of financial setbacks, providing a more holistic approach to risk management.