What does "insurable interest" mean?

"Insurable interest" refers specifically to the financial investment a person or entity has in a property or a life that is covered by an insurance policy. This concept is fundamental in insurance because it ensures that the policyholder stands to suffer a financial loss if the event insured against occurs. Insurable interest must exist at the time of the contract for insurance to be valid, providing a legitimate reason for the individual or entity to seek coverage.

In the context of property insurance, insurable interest means that the insured has a direct financial stake in the property being insured. For example, a homeowner has an insurable interest in their home because they own it and would incur financial loss if it were damaged. Similarly, a business has an insurable interest in its physical assets and operations.

Understanding insurable interest helps clarify the ethical structure of insurance; it prevents individuals from profiting from losses they do not suffer. This principle maintains the integrity of insurance as a risk management tool, ensuring that only those who face real financial stakes can obtain insurance coverage for their interests.