What is the concept of "insurable interest"?

The concept of "insurable interest" is fundamentally about ensuring that the policyholder has a legitimate stake in the insured item or event. This requirement means that the policyholder must stand to suffer a financial loss if the insured event occurs, such as damage to property or the death of a loved one. Insurable interest must exist at the time the insurance policy is purchased and typically needs to be maintained throughout the duration of the insurance coverage.

The rationale behind requiring insurable interest is to prevent moral hazard, where an individual might otherwise have an incentive to cause a loss to benefit financially from the insurance payout. For example, if someone were to insure a property they do not own, they might be tempted to damage it to collect the insurance money. Therefore, insurable interest serves to confirm that the policyholder has a genuine risk associated with the insured asset.

This concept is a core principle in the insurance industry because it helps maintain the integrity of insurance contracts and ensures that they are used for legitimate risk management purposes.