An insurance policy is one of those things you know you must have for your restaurants and/or foodservice operations.
But, when it comes to losses following a severe storm, hurricane, or other natural disasters; policyholders commonly ask “what’s covered and what isn’t?”
Business insurance policies will usually specify that they cover “direct” and “physical” losses in the case of damage caused by a storm or hurricane, but not necessarily “indirect” losses. It’s very important to be aware of what these terms mean and what their policies actually cover.
Table of Contents
Understanding Insurance Lingo in 2025: Direct, Physical, and Indirect Losses
Navigating the complexities of insurance language is crucial for business owners, particularly in 2025 when climate change has increased the frequency and severity of natural disasters. Understanding the distinctions between different types of losses can help ensure you have the right coverage in place to protect your business.
Direct Losses
“Direct” losses, often referred to as “perils” in insurance terminology, refer to damage immediately inflicted by a disaster.
For example, if a hurricane strikes and takes the roof off your building, your direct losses would include damage to the structure, as well as to equipment, furniture, inventory, or other items that were damaged as a result.
However, it’s important to note that some direct causes of loss, like flooding, are often excluded from standard property policies.
As of 2025, most flood insurance is still purchased separately through the National Flood Insurance Program (NFIP) or private insurers. The complexity of flood insurance has increased, with higher deductibles and more stringent policy conditions due to the rising incidence of catastrophic flooding events.
Questions often arise after a hurricane regarding whether the damage was caused by flooding, storm surge, or wind, and this distinction can significantly impact your claim.
With the increase in extreme weather events, it’s more important than ever to thoroughly understand your coverage and any exclusions related to direct losses.
Physical Losses
Insurance policies commonly require a loss to be “physical” to qualify as a direct loss, yet the term “physical” is often left undefined. This has led to various interpretations in courts, creating ambiguity around what constitutes a physical loss.
For instance, if a hurricane knocks out power to your restaurant, causing all the food in your coolers to spoil, it’s debatable whether the spoilage is a direct physical loss.
Since the building itself didn’t sustain any damage, the spoilage might not be covered under traditional definitions of physical loss.
The legal landscape in 2024 still lacks consensus on this issue, with court rulings varying widely based on jurisdiction and policy language. Given this uncertainty, it’s essential to work closely with your insurance broker to clarify how your policy defines physical loss and what types of incidents it covers.
Indirect Losses
“Indirect” losses, often called “consequential” losses in business insurance policies, are not caused directly by the disaster but are the result of the direct loss. Business interruption is the most common example of an indirect loss.
For example, if a hurricane blows the roof off your property, you not only face the cost of rebuilding but also the loss of income during the rebuilding process. This lost income represents an indirect loss.
In 2024, indirect losses have become a more pressing concern for businesses, as supply chain disruptions and extended recovery times have increased the financial impact of these events.
While direct losses are typically covered by standard business insurance policies, indirect losses can be even more damaging. Recovering from the loss of a roof is one thing, but losing several months of income while repairs are made could push a business to the brink of closure.
Ensuring Adequate Coverage for Indirect Losses
To protect against indirect losses, it’s crucial to have business interruption coverage as part of your policy. In 2024, business interruption values are still calculated using revenue from the most recently completed 12-month financial period.
This is typically done using a deductive approach: annual net sales plus other earnings from business operations, minus certain non-continuing expenses.
However, if your company is experiencing rapid growth or significant changes, it’s advisable to update your business interruption values more frequently than once per year to ensure adequate coverage.
Additional Time Element Coverages to Consider
Restaurant owners in 2024 should also consider additional time element coverages for indirect losses, including:
- Civil Authority Coverage: Protects against losses incurred when a government authority restricts access to your business due to a covered event, such as a mandatory evacuation before a hurricane.
- Dependent Properties Coverage: Covers losses resulting from damage to a supplier or key business partner that affects your operations.
- Off-Premise Service Interruption Coverage: Covers losses due to interruptions in essential services (e.g., electricity, water) caused by damage away from your premises.
A comprehensive review with your insurance broker will help determine what constitutes a “physical loss” under your policy and identify any additional coverages or policy limits you may need to protect your operations adequately.
With the increasing frequency of extreme weather events and other disruptions, taking these steps is more important than ever to safeguard your business in 2024.
Speak to your insurance broker for more information about these coverage options. Learn more at Hub International’s website.
