Consequential Loss from a Defect (Mangelfolgeschaden)

Concept

Consequential loss from a defect is damage that arises as a result of a defect in a delivered item or a performed service, affecting other legal interests of the injured party that are not directly affected by the defect itself – for instance, when a faulty component causes a fire that destroys other assets belonging to the injured party.

Distinction from Pure Defect Damage

Consequential loss from a defect must be distinguished from pure defect damage (also called performance damage), which relates directly to the defective item or service itself, such as the cost of rectification or the diminished value of the defective item. Because pure defect damage essentially concerns performance of the original contract, it is generally excluded from cover under liability insurance as performance damage.

Relevance for Product Liability Insurance

In product liability insurance, the distinction between defect damage and consequential loss from a defect is of central importance, since only the consequential loss – that is, damage extending beyond the defective product itself to other legal interests of the injured party – is covered by the insurance, while remedying the defect in the product itself generally remains the manufacturer’s entrepreneurial risk.