Insurable interest is a situation where one person benefits from the permanence of another individual or thing. An individual is said to have an insurable interest in someone or something if their loss or damage would cause a loss to the individual. Before an insurance purchase is approved insurance providers investigate if the policy purchaser has any insurable interest on the item or person that is meant to be covered. 

For instance, people have an insurable interest in their assets( house, cars, etc) but not in that of other people. It is important that the policy purchaser has an insurable interest on the insured if not it might lead the policy purchaser to cause harm to the insured in order to pay claims of the benefits. 

Interpretation of insurable interest

There are many products under insurance that help us cover different areas that concern us such as our life, health, vehicles, disability, and assets,  against any unplanned loss or damage.

Insurable interest is the basis of Insurance such that should any mishap fall upon the insured property, person, or event, the policy buyer would lose. For instance, a person can purchase auto insurance on his car and not on his neighbor’s car because if he should lose or damage his car, it would affect him such that he won’t be able to move around freely, but if his neighbor loses his car it does not directly affect him in any way. From the reason given in this example, we can deduce that the man has insured interest on his car but not on his neighbor’s car.

Moral hazards and insurable interest

Moral hazards are consciously causing loss or damage to an entity for the profit that would be gained if such an entity goes through loss or damage. When someone does not have the potential of running into a risk of loss, the probability of the moral hazard occurring is high. Using the example below let’s understand the relationship between moral hazards and insurable interest.

For instance, Mr. A buys home insurance on Mr. B his neighbor’s house, Mr. A runs into a financial loss and is in need of money, Mr. A knowing that he has nothing to lose if Mr. B loses his house, sets the house on fire in other to lay claims on the home insurance he bought on the house. That action taken by Mr. A is called a moral hazard.  If Mr. A would be affected by that action he would not set the house on fire.

Also read: Irrevocable beneficiary

In order to curb such moral hazards, insurance companies usually endeavor that policy purchasers have insurable interest on the insured before selling the policy to them.

Life Insurance and insurable interest

In the past, people took out life insurance on individuals they felt would pass on soon and they could get their death benefit. But laws around insurance have since been reviewed such that, If you do not have an insurable interest in someone you cannot take out insurance on that person, if not you would be less interested in the well-being of the person but more interested in their death so much that you could quicken the process because of the benefit you stand to gain. 

To qualify to take out life insurance on a person, the person may have to be your you have to be your relative, a business partner, the main employee, or even a borrower.

You would be required to bring proof of insurable before the approval of the life insurance policy or any other insurance policy.

The face value of the insurance should not be more than the value of the human’s life to avoid violation of the indemnity principle and furthermore moral hazards.

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What is an example of insurable interest?

An example of an insurable interest is a policyholder who purchases home insurance for their own residence but not for that of a neighbor. The person has no insurable stake in any monetary loss brought on by harm to their neighbor’s home.

What is the importance of insurable interest?

In the world of insurance, insurable interest is essential. It is against the law to purchase property insurance if you don’t own an insurable interest in it. For instance, you cannot purchase home insurance for your neighbor’s residence. A moral hazard would be produced by such a situation.