What does insurable interest refer to?

Insurable interest is a fundamental principle in insurance that ensures a policyholder has a legitimate interest in the preservation of the insured item or individual. This means that the policyholder stands to suffer a financial loss if the insured event occurs, such as damage to property or the death of a person. In essence, insurable interest exists when a policyholder can demonstrate that they would incur a financial setback as a result of the loss of the insured asset.

For example, a homeowner has an insurable interest in their house because if it were damaged or destroyed, they would face significant financial consequences. The requirement of insurable interest is established to prevent moral hazard, where individuals might take risks or act maliciously to benefit from a payout from an insurance policy. Therefore, the concept of insurable interest is directly tied to the risk of financial loss, making it a critical component in the formation of an insurance contract.