Insurable interest is a fundamental principle of insurance that stipulates that a person or entity seeking to obtain an insurance policy must demonstrate a legitimate concern for the preservation of the insured subject against loss or damage. This means that the policyholder must stand to suffer a direct financial loss or certain types of non-financial losses if the insured event occurs. The concept serves to ensure that insurance policies are purchased for risk management purposes and not for speculative gains.
For an insurable interest to exist, there must be a relationship between the policyholder and the subject of insurance—whether it be property, a person, or some other entity—such that the policyholder would be adversely affected by the harm or loss of the subject. In the case of property insurance, for example, an individual would have an insurable interest in their own home because they own it and would incur financial loss if it were damaged or destroyed. Similarly, in life insurance, a person has an insurable interest in their own life and often in the lives of close family members or business partners.
The requirement for insurable interest must be met at the time the insurance policy is taken out. In some types of insurance, such as life insurance, the insurable interest must exist at the time of the policy’s inception, but it does not need to exist at the time of the insured event. This principle prevents gambling on insurance and reduces the potential for moral hazard, where the presence of insurance might otherwise encourage risky behavior. It also serves a legal purpose, helping to define and enforce the legitimacy of the insurance contract. Without insurable interest, an insurance contract could be considered null and void.