What is insurable interest?
Insurable interest is a financial stake in any person, event, or property that may incur a monetary loss. An entity or person is said to possess an insurable interest when the destruction, loss, theft, or damage of the property, person, or event could result in a monetary loss or another type of hardship for that entity or person. In most cases, insurance policies cannot be legally issued to a person or entity without an insurable interest in the property, person, or event being insured. Persons or entities who will not experience a monetary loss or other hardship if the person, event, or property is damaged, lost, or destroyed are usually barred from purchasing insurance policies for that property.
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When do I need to be aware of insurable interest?
You need to be aware of insurable interest whenever you are attempting to purchase insurance. For example, you can usually purchase homeowners insurance for a home that you own, because you would be financially damaged if the home were destroyed or damaged. However, you usually cannot purchase homeowner's insurance to cover a home that you rent, because you lack an insurable interest in that home.
What is important to know about insurable interest?
Insurable interest is a fundamental concept that makes insurance policies possible. Insurable interest is an important component of insurance policies for several reasons:
- It decreases the chances of insurance policies creating a moral hazard by preventing persons or entities from profiting by insuring properties that they do not have a financial stake in.
- Insurable interest is a key component of the principle of indemnification, which holds that policyholders should be restored to their pre-loss condition, rather than rewarded or penalized through insurance proceeds.
- To protect an insurable interest, the person with the interest must purchase an applicable insurance policy.