Insurable Interest
Candlefocus EditorThe presence of insurable interest is important for any kind of insurance policy. Without it, a person would have no financial incentive to make sure that the risk or object remains well and safe since it is not their own. This could lead to inappropriate moral hazard that could increase the frequency and severity of losses because people might be tempted to willingly allow them to happen so they can receive an insurance payment.
Insurable interest can take many different forms. The concept is wide enough to apply to virtually any kind of merchandise or entity. For example, a person can have an insurable interest in their own personal possessions (like a laptop or a car), a business (such as a restaurant or a store), or a home. Insurable interest can also apply to persons and their lives, in the case of life insurance. In any case, the policyholder must be able to demonstrate an economic loss if the risk eventuates.
At the same time, an innominate party cannot have an insurable interest, and any contract of insurance in which this is the case is void. For example, no insurance policy can be purchased for a random stranger or someone outside the policyholder’s family. Additionally, the presence of an insurable interest does not automatically make a person in a given contractual relation insured. For instance, tenants do not automatically have an insurable interest in their landlord’s property even though they would suffer a financial loss if it were damaged or destroyed due to their lease agreement. In this case, the landlord would need to buy a policy under their own name.
The concept of insurable interest is essential in the insurance world and is the basis of any successful policy. Knowing and understanding insurable interest is important not only to policyholders, but also to insurers, as it helps prevent undue claims, excessive liability, and general confusion.