Understanding Insurable Interest
Insurable interest is a principle that protects anything susceptible to financial loss. It applies when harm or loss to an object could result in financial loss or other difficulties for an individual or entity.
To have an insurable interest, a person or entity should purchase an insurance policy that covers the relevant person, item, or event. This policy mitigates the risk of loss if the insured asset suffers harm or damage.
Insurable interest is critical for the validity of an insurance policy and protects against intentional harm. People or entities that aren't at risk of financial loss cannot have an insurable interest, thus can't purchase a policy for protection.
The Concept of Insurable Interest
Insurable interest refers to the legal right of a person or entity to insure something that, if lost, damaged, or deceased, could lead to financial loss or hardship. This interest is mandatory for all insurance policies. At the time of purchase, the policyholder must have an insurable interest in the insured item or person. This interest can emerge from ownership, possession, relationships, or dependency. For example, one can insure their own house, car, or job, but not that of their neighbor. The insurable interest is capped at the potential financial loss or hardship. Here are some examples:
- A bank with a mortgage loan on a property has an insurable interest in it.
- A parent dependent on a child for support and care has an insurable interest in the child's life.
- A landlord renting property to tenants has an insurable interest in that property.