Consequential loss

Category: Claims and policy principles · Reviewed by the Apex broking team · Last reviewed 2026-08-22 · ~3 min read

The contract law meaning

The starting point is Hadley v Baxendale (1854) 9 Exch 341, which divides recoverable damages for breach of contract into two limbs: loss arising naturally, in the usual course of things, from the breach; and loss which, although not arising naturally, was in the reasonable contemplation of both parties at the time of contracting as a probable result of breach because of special circumstances known to them. The first limb is conventionally called direct loss; the second, consequential or indirect loss.

English courts have for many years construed a contractual exclusion of “consequential loss” as excluding only second-limb loss. The consequence surprises most commercial parties: lost profits flowing naturally from a breach are ordinarily first-limb loss and are not excluded by a bare consequential loss exclusion. A party that means to exclude loss of profit, loss of revenue, loss of use or loss of contract has to say so.

Whether that orthodoxy still holds

It holds, but with less force than it once did. In Transocean Drilling UK Ltd v Providence Resources plc (Court of Appeal, 2016) the court questioned whether the traditional equation should be applied mechanically, observing that words take their meaning from their context and that the same phrase may mean different things in different contracts. In 2 Entertain Video Ltd v Sony DADC Europe Ltd the High Court considered a more natural-language reading before reverting to the conventional analysis on the facts.

The current position is best stated as a strong presumption rather than a rule: absent clear contrary indication, “consequential loss” in an exclusion clause means second-limb loss, but the clause will be construed in its own context and a definition in the contract will displace the presumption. The drafting answer has not changed — define what is excluded, item by item, rather than relying on the label.

The insurance meaning

In insurance the phrase came into use for a quite different purpose. A property policy indemnifies the insured for physical damage; it does not, by itself, pay for the trading loss that follows while the premises are out of use. Cover for that loss was originally sold as consequential loss insurance, and older wordings, leases and contract conditions still use the term in that sense. The modern name is business interruption insurance, and the two are the same thing.

So a lease or building contract requiring the tenant or contractor to maintain “consequential loss insurance” is almost certainly requiring business interruption cover, not asking for something exotic. Conversely, a limitation of liability clause in a supply contract excluding “consequential loss” is using the contract law sense. The same two words, opposite jobs.

Where the confusion causes real loss

Three situations recur. First, a supply or services contract in which the customer accepts an exclusion of consequential loss believing it has preserved its lost profits, or the supplier accepts it believing it has excluded them; both are wrong, and the point only emerges when there is a loss. Second, a contract condition requiring consequential loss cover, satisfied by a policy that in fact has no business interruption section, or one with an indemnity period far too short.

Third, and most common in claims practice, a property loss where the insured assumes the property section will pay for the trading consequences of the damage. It will not. The property section pays to repair or replace; the business interruption section pays for the loss of gross profit and the increased cost of working during the indemnity period. If that section was not bought, or the indemnity period was set at twelve months for a business that takes two years to recover, the shortfall falls on the insured.

Reading a document for which meaning applies

Some quick tests. If the phrase appears in a limitation or exclusion of liability clause, in a contract for goods or services, alongside words like “indirect”, “special” or “punitive”, it is being used in the contract law sense. If it appears in an insurance obligation, alongside references to sums insured, indemnity periods, gross profit or a policy schedule, it means business interruption cover. If a contract defines it, the definition governs and the general law is beside the point.

Where a document is genuinely ambiguous, the practical answer is not interpretation but amendment: say “business interruption insurance” where that is what is meant, and list the excluded heads of loss where an exclusion is meant.

Why it matters

Consequential loss is a phrase that looks like a term of art and behaves like two. In commercial contracting it is the single most reliable source of mismatched expectations about lost profits; in insurance it is the reason some businesses discover after a fire that they insured the building and not the business. Both problems are drafting problems, and both are cheap to fix before the event and impossible to fix after it.

Frequently asked questions

Does excluding consequential loss exclude lost profits?

Usually not. English law conventionally reads “consequential loss” in an exclusion clause as second-limb Hadley v Baxendale loss, and profits lost as a natural result of the breach are first-limb loss. To exclude loss of profit, revenue, use or contract, the clause has to name them.

Is a consequential loss policy the same as business interruption insurance?

Yes. Consequential loss insurance is the older name for the cover now sold as business interruption insurance, protecting the trading result rather than the damaged property. Older leases and contract conditions still use the earlier term.

Why does the same phrase mean two different things?

Because it developed independently in two fields. The contract law usage comes from the second limb of Hadley v Baxendale in 1854; the insurance usage describes the loss that follows physical damage. Which meaning applies depends entirely on the document the phrase sits in.

How should a contract deal with it?

By definition rather than by label. If liability for particular losses is to be excluded, list them. If insurance is required, name the cover — business interruption insurance — and specify the minimum indemnity period rather than relying on the phrase alone.

Related entries

• Business interruption insurance
• Consequential loss pi cover
• Increased cost of working
• Heads of loss
• Business interruption insurance uk

This entry is part of the Apex Insurance Wiki. It is general insurance information, not legal advice, and states the position as at August 2026. Last reviewed 2026-08-22. Next review: 2027-02-22. Always read the policy wording and take advice on your own facts.

Apex Insurance Brokers Limited is authorised and regulated by the Financial Conduct Authority (FRN 724952). This page is general information, not advice on a specific policy.