What is consequential loss coverage for apartment buildings?

Consequential loss (also called consequential damage) refers to indirect losses that result as a consequence of a direct covered loss, rather than from the peril itself. In the apartment context, consequential losses are the chain-reaction effects that a covered event triggers beyond the immediate physical damage.

The ISO Commercial Property Causes of Loss—Special Form (CP 10 30) includes a consequential losses provision under Additional Coverages that pays for loss or damage to property caused by change of temperature or humidity resulting from direct damage to the building or its equipment. For apartment buildings, the most common scenario is a covered equipment breakdown or fire that disables the HVAC system, causing frozen pipes that burst and create water damage throughout the building in winter, or mold growth from sustained high humidity in summer.

However, the standard consequential loss coverage is narrow. It requires the temperature or humidity change to result from direct physical damage to the building or equipment on the premises by a covered cause of loss. If the temperature change results from an off-premises utility failure (such as a power grid outage), the consequential loss is excluded unless the utility services endorsement (CP 04 17) is in place.

Equipment breakdown coverage (ISO EB 00 20) includes its own consequential damage provision that is often broader than the property policy's. It covers spoilage of perishable goods and other temperature-sensitive damage resulting from mechanical or electrical breakdown of covered equipment. For apartment buildings with commercial-grade HVAC systems, boilers, and refrigeration equipment, this coverage fills an important gap.

Apartment owners should also consider how consequential losses interact with loss of rents coverage. If a covered fire damages the boiler room and the resulting loss of heat makes units uninhabitable for three months during winter, both the boiler repair (direct loss) and the lost rental income (consequential loss to the income stream) should be covered under the property and loss of rents provisions respectively.