Consequential damages is a legal term referring to an injury or loss that is sustained by someone as an indirect result of another person's action. In civil litigation, damages are paid as a way to financially compensate a plaintiff for a tangible loss. Losses can include, but are not limited to, medical expenses, lost wages, or property damage.
Consequential damages are also sometimes referred to as special damages. They are one of two types of damages – the other being direct damages. Consequential damages crop up in contract disputes, insurance claims, and personal injury cases. In legal actions, the effects of these indirect damages are described, assessed, and assigned a monetary compensation. Many insurance policies and contracts include a consequential damages waiver because of the expensive claims these damages can engender.
In a contract dispute, a consequential damage could be the amount of lost revenue a business suffers because a contractor didn’t complete a renovation on time. A consequential damage in this instance has to be something that was foreseeable when the contract was signed, and also something that can be measured with a monetary value. Consequential damages may be incurred if a breach of contract results in a loss of earnings or profits, requires the repair or replacement of property, or results in the loss of an irreplaceable piece of property.
Insurance firms deal with other types of consequential damages when the damages are included as a clause to the policy. An example might involve a homeowner who takes out an insurance policy that covers storms and other natural disasters, and his or her policy also has a clause that includes coverage of consequential damages. Then, gale-force winds knock over a tree on his or her property, sending it crashing though the garage roof. The hole in the roof is a direct damage of the storm; but if the falling tree also severed the power lines to the garage, which in turn caused 25 pounds of sirloin steak in an electric chest freezer to spoil, the cost of that spoiled meat would be covered as a consequential damage of the storm.
Another type of consequential damages is seen in personal injury cases and concerns a harm or injury to a person that occurs as a consequence of an initial act by someone else. If a person installs a water feature in a backyard that causes water to overflow into the neighbor’s yard down the hill, that flooding could be considered a consequential damage. Likewise, if someone trips on the extension cord to a holiday light display and breaks a leg, that injury could also be considered a consequential damage.