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Types of Economic Loss

When discussing economic loss, it’s important that you fully understand the basic meaning as well as the defining components that categorizes a case into such boundaries. Before getting started, know that many factors go into an economic loss case, and it can be challenging at times to come to a clear solution. That’s why we are here to help.

When an individual or organization loses money, it’s called an economic loss. An economic loss can be caused by a number of different situations, and range in severity depending on each individual case.

Economic loss leans toward the side of facts and figures and is more “clear-cut” when compared to non economic loss. Unlike non economic loss, this type of case should in theory be easier to reach a conclusion since tangible losses are actually involved.

Additionally, economic loss equates to financial loss. They can be calculated from statements, records, medical bills, past and future expenses, wage losses, future lost earning capacity or profits, property damage, and more.

While it’s true that economic loss can be clear cut and easily measured, it’s important to note that there are many different forms. This article will provide you with an in-depth look at the different types of economic losses and teach you everything you need to know before declaring an economic loss yourself.

Before we cover the different types of economic losses, it is important to fully understand what categorizes as an economic loss and what that can mean for your specific case.

What Is An Economic Loss?

As we have briefly discussed, the term economic loss can be identified as any situation where an individual or organization loses money. This financial loss is a visible loss that can be identified through any legitimate financial statement. Keep in mind that this type of damage is not from a physical injury, personal injury, or any other type of non-economic damages that cannot be proven, it has to be a tangible loss of assets, otherwise it would be categorized as a non economic loss.

The Types Of Economic Loss

Many things can be categorized as an economic loss, which is why economists have divided this term into several categories and subcategories to further describe a situation. The first major distinctions of this term can be separated into two main categories: consequential economic loss and and pure economic loss.

Now that we have broken economic loss into two categories, let’s take a closer look at each classification and see how they differ from one another. To begin, we will now analyze the vital elements that define consequential economic loss.

Consequential Economic Loss

Consequential loss is not an overly complex subject.

In a nutshell, consequential loss is an indirect loss resulting from an insured’s inability to use business property or equipment. It’s directly caused by another event. This also means that the loss of money is caused by an additional situation, like property damage of not delivering as promised on services or goods. In simpler terms, consequential loss is the direct result of another event failing.

Other examples of consequential loss include continual salary payments, fixed operational costs, and more. The important thing to remember is that all types of businesses can be affected by consequential loss. So if you’re a business owner, it’s crucial to understand the policies and procedures to protect yourself and help maintain your security.

One thing you can do is to purchase property, fire, flood or casualty insurance. This will help keep you covered, as coverage policies will not compensate for any lost income from an inability to use property or equipment.

There are some insurance protection options you can seek as well. One such example is business income insurance – also known as business interruption insurance.

What this type of insurance does is compensate a business for any loss of revenue in the event of natural disasters or other kinds of catastrophes. It also covers any physical damage to the property or equipment. This rule also states that it will cover situations that happen when revenue is lost from events like extended power outages, floods, or mudslides.

Additionally, this type of insurance can protect against any income loss from contract disputes and breaches that happen from a supplier or a third party.

There are a variety of insurance requirements, however they do vary depending on the situation. While we won’t go into much detail here regarding insurance and technical details, feel free to connect with a legal consultant or conduct your own research.

The key is prevention. As a business owner, you should do everything in your power to prevent this type of loss from occuring in the first place.

Pure Economic Loss

The other type of economic loss is known as pure economic loss.

The simple explanation is that pure economic loss cases involve a loss of money, and do not include property damage. They are basically financial damage suffered thanks to the negligence of another party — excluding any physical damage to a person or property. In other words – these losses are purely economic. If an individual or business partake in a negligent act that causes you or your business financial damages, then it would be categorized as a pure economic loss.

To help paint a picture of what pure economic loss might look like, here are a few examples.

  • direct result of a bad investment
  • loss of business due to competitors
  • the loss of reputation and goodwill in a community

Other categories are expenditure, loss of profit, profitability, or loss of some other financial gains.

Negligence is commonly applied to tort cases in order to receive some type of monetary compensation for compensatory damages. A claim for these damages can only be made if the defendant has been proven to have made a negligent act that resulted in these damages.These losses can be anything that involves an individual’s physical health, financial status, mental well-being, relationships, or property.

What is the Economic Loss Rule?

To further explain this topic, it’s important to cover the foundations of the economic loss rule. However, with that being said, this doctrine can be very complex, which is why we are only going to dive into the basic fundamentals for now.

Cohen and Wolf define the economic loss rule as “damages for economic loss are not recoverable based on tort theory when unaccompanied by physical property damage or personal injury.” To further this definition, there are three variants that are involved when applying this doctrine. Cohen and Wolf continue by defining the variants as followed:

  • prohibiting recovery for economic loss in tort where there is no personal injury or property damage, without regard to contract
  • prohibiting recovery for economic loss in tort where the loss is also compensable by a breach of contract claim
  • prohibiting recovery for economic loss on both contract and tort theories, unless the tort is separate and independent from the claimed contract breach.1

Conclusion

If you or your business has suffered a legitimate economic loss, just know you can legally be compensated for your damages. Talking to an attorney can help clarify your legal rights as well as go over your unique situation. If you would like to talk to a professional in the field, feel free to contact one of our Bremer Whyte attorneys for a free consultation.

For further resources on general civil litigation, check out our blog and other online resources today.