What does it mean to have insurable interest in an insurance contract?

Having insurable interest in an insurance contract refers to the financial stake or interest a person has in the safety or existence of the insured property or individual. This concept is foundational to the insurance industry, as it ensures that only those who stand to suffer a loss from the damage or destruction of the insured item can take out an insurance policy on it.

For example, if someone owns a house, they have insurable interest in that property because they would incur a financial loss if it were damaged or destroyed. Similarly, a person has insurable interest in their life, as they have financial responsibilities or dependents that would be impacted by their death. This principle helps to prevent moral hazard, where individuals might otherwise take undue risks if they did not have a genuine financial concern regarding the insured item.

A claim for benefits cannot be made if one does not have a direct financial interest in the asset, as this would undermine the purpose of insurance contracts. Thus, recognizing insurable interest is crucial for both ethical and practical reasons in the insurance field.