What does “insurable interest” mean?

Insurable interest refers to the financial stake or interest that an individual or entity has in the subject of an insurance policy, which gives them the legal right to purchase that policy. This concept is fundamental in the insurance industry because it ensures that the policyholder stands to suffer a financial loss or disadvantage if the insured event occurs, hence justifying their need for insurance. For example, a person is considered to have an insurable interest in their own life, as well as in the lives of others for whom they may have a financial obligation, such as family members or business partners.

This requirement helps to prevent moral hazard, where individuals might be incentivized to cause harm to an insured item if they do not have something to lose. By ensuring that only those with a legitimate financial stake can take out an insurance policy, the industry maintains ethical standards and protects both the insurer and the insured from potential misuse of insurance products.