What Is Insurable Interest?

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 an insurable interest on the things in order to be able to get them covered.

Simply, beneficiary of an insurance policy must have financial ties or title over the insured car, property or life in order to have insurable interest. Policyholders must stand to lose if something happens to insured properties or lives. Insurers 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 policyholder lost, nothing more or less. In other words, you cannot claim more than what you have lost or if you haven’t lost anything at all. Therefore it is pointless to insure something that isn’t yours or you have no connection to it anyway.

For example, the owner of a vehicle has undoubted title on it. He/she has paid money to buy it and would lose this money when it is totaled or need money to get it repaired. Therefore, owners aren’t questioned when they want to insure their property. 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 insurable interest on such automobile or property 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 policy as the interested party. Even further, they can force insure a property or vehicle if the owner fails his/her duty to buy sufficient coverage for it, 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 insure it or claim entitlement of the coverage arranged by the owner.

People or companies need to be invested enough on the wellbeing of insured assets or lives to be able to claim insurable interest over them or on a policy covering them. 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 life insurance”. A company can insure the lives of their key employees and they do. Loss of such personnel can cause serious disruption to the operation of a business and there are policies to compensate them for such losses.

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 things you just insured. However, an owner wouldn’t think like that because there is no point, as the insurer would only pay what he/she just lost. Policyholders not only must not harm the property covered but also they must protect it. Only someone who stands to lose in case of any damage would protect a possession.

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 insurers since you will be responsible for it and stand to lose its use 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 a loss. Guardians may not need to be invested on the things to be able to buy insurance.

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