Insurable Interest

What is Insurable Interest?

Insured interests are the financial commitment or relationship of the party that insures in the subject of insurance, such as property, life, or liability. Such an interest must be in place at the time of issuance of the policy and continue until the expiration of the policy. It ensures that the insurer is provided with an honest explanation of why the individual is seeking insurance, thereby preventing fraudulent insured parties from taking out policies as an investment strategy.

For life insurance, a person has an insurable interest in the life of another if they would be harmed financially should that person die, for example, a spouse or business partner. Ownership or a financial interest in the property generally defines insurable interest in the insurance.

Insurable interest guards against moral hazards. It ensures that insurance contracts are based on actual economic risk and are not for just a potential profit from other people’s adversities. However, if insurable interest was not there, insurance contracts could be used as a means of gambling or fraudulent institutions.

Example

One of the ways in which insurable interest can be seen is through property insurance. For example, John might be the owner of a house he lends to tenants. As an owner of the property and a landlord who generates rental income from it, John can be considered a financially interested person. In this situation, John's insurable interest is implied because any property damage due to fire, theft, or other covered perils could entail financial losses for him. As a result, John can purchase property insurance to protect himself from the losses. This relationship of insurable interest guarantees that he is not playing with insurance as a speculative investment but is entrusted with his financial welfare, which depends on the property. It underscores the fundamental principle of insurance: coverage exists because of insurable interest, protecting insurers from situations when people abuse insurance just to profit without caring about the insurer.