Reviewed by Oct 05, 2020| Updated on
Insurable interest refers to the interest of a person, financial, or otherwise, in obtaining insurance for a person or property. A person or an organisation having insurable interest are likely to suffer a loss due to damage or destruction of the insured object or person. The person having insurable interest insures the property or person through an insurance policy which mitigates the risk of loss.
In insurance contracts, it is essential for the party to have an insurable interest in the property or goods or person. Otherwise, the insurance policy is not a legal contract and hence not enforceable. In general, persons who do not suffer any financial loss due to damage or destruction of the property or person do not have an insurable interest.
An insurance policy provides a cover for the risk exposure to a policyholder. There are a variety of insurable products or policies to cover different types of risks. The products provide insurance against the risk of automobile repairs, medical care expenses, income loss due to disability, death, and damage to assets or goods.
Insurance is a type of investment through payment of insurance premiums that helps protect from financial loss. The contract mitigates loss from unforeseen events, death, or damages. Many companies buy insurance on their staff, especially the top management, to cover for the risk of loss due to death or disability. Similarly, a sports team may insure one of their key players.
An example of insurable interest is a policyholder buying property insurance for their own house but not for their neighbour’s house. The person does not have an insurable interest in any financial loss arising from damage to their neighbour’s house.
Thus, the principle of insurable interest is based on no moral hazards in a policy. Moral hazard occurs when a policyholder has an incentive to cause damage to the property and claim insurance.
The principle of insurable interest also works along with the indemnification principle, which requires insurance policies to compensate a policyholder for the losses covered. Indemnification requires that insurers design such policies so as to appropriately cover the value of the asset at risk. Poorly designed insurance policies can create moral hazard and financial loss to an insurance company.