What is "insurable interest" in the context of obtaining insurance?

Insurable interest is defined as the potential for financial loss due to damage or loss of an asset. This concept is crucial in the realm of insurance because it establishes the rationale for obtaining a policy. When an individual or entity has an insurable interest in something, it means that they stand to suffer a financial loss if that asset is harmed, lost, or destroyed. This relationship provides a valid reason for purchasing insurance; it helps to prevent moral hazard, where someone might otherwise be incentivized to cause damage to collect on an insurance claim.

In practice, insurable interest typically needs to exist at the time the insurance policy is purchased and, in many cases, also at the time a claim is made. This requirement ensures that only those who have a legitimate stake in the insured object can benefit from the insurance, reinforcing the purpose of insurance as a risk management tool rather than a financial windfall.

This understanding of insurable interest helps maintain the integrity of the insurance system, ensuring that it operates on principles of fairness and necessity rather than opportunism.