One of the key principals of insurance is that it is there to indemnify the losses policyholders and other interested parties suffer. It is not a mechanism that allows people to bet on something happening to certain items or people. So, you need to have legal or contractual rights or charge over these things if you want to protect them or even more importantly if you want to be in a position to demand compensation from a policy.
Simply, beneficiary of a policy must have financial ties or title over the car, property or life in order to have insurable interest. People must stand to lose if something happens to them. Companies have to look for such ties in order to avoid moral hazard.
According to the Indemnification Principle, a policy can only promise to indemnify what the holder lost, nothing more or less. In other words, you cannot claim more than your damages or if you haven’t any at all. Therefore it is pointless to pay premiums when you cannot make a claim and collect settlement.
For example, the owner of a vehicle has undoubted title on it. He/she has paid money to buy it and would waste this money or some of it when it is totaled or need to be repaired. Therefore, owners aren’t questioned at all. In the same way, nobody questions a wife or husband buying life insurance on her/his spouse because they clearly stand to suffer financially should they die.
However, others may have stake on them too. For example, lenders have a clear stake on the wellbeing of an asset that is collateral for the loan. Therefore, they can be listed on the schedule as the interested party. Even further, they can force insure a the collateral if the borrower fails his/her duty to do so, according to the loan agreement. Lienholders stand to lose their security should something happen to the underlying asset (a house, a car) and therefore they are invested enough to be able to cover it or claim entitlement over the coverage arranged by the owner.
People or companies need to be invested enough on the wellbeing of assets or lives to be able to claim interest over them or on existing coverage. If not, you cannot buy coverage for something that has nothing to do with you because this would give you incentive to cause or wish them harm.
Another good example is the “key employee”. A company can insure the lives of their key employees and they do. Death of such personnel can cause serious disruption to the operation of a business and there are policies to compensate them for it.
Technically, you cannot go around insuring things and lives and expect to collect a payout if something happens to them. This creates a moral hazard because you would want something happen to those things to collect. However, an owner wouldn’t think like that because there is no point, as the carrier would only replace their things or pay enough for it. Policyholders not only must not harm the property covered but also they must protect it. Only someone who is worried about their possessions would protect them.
There are circumstances for wanting to insure a car you don’t own and it may be acceptable to a carrier even though insurable interest on the vehicle isn’t as clear. For example, you may want to drive the automobile your father hasn’t been using. This may be perfectly acceptable to some companies since you will be responsible for it and suffer if something happens to it. So, the rules may not always apply literally.
Also, executors of an estate of a deceased would be able to buy insurance for the assets in management in order to protect the estate. This comes from legal responsibility rather than any concern over it. Guardians may not need to be invested on the things. Rather it comes from responsibility and necessity to look after.