What does the term "insurable interest" refer to?

The term "insurable interest" refers to the requirement that a policyholder has a legitimate interest in the item or person being insured. This means that the individual or entity seeking insurance must stand to suffer a financial loss or hardship if the insured item is damaged or destroyed, or if the insured individual suffers a loss. This principle is fundamental in the insurance industry because it helps to prevent moral hazard and ensures that insurance is used as a risk management tool rather than a means to profit from losses.

Insurable interest is a key condition for the validity of an insurance contract. Without having insurable interest, the contract may be deemed void, as it could lead to situations where individuals might take out insurance on items or people they have no connection to, creating opportunities for fraudulent claims. This principle protects both the insurer and the integrity of the insurance system.

Understanding insurable interest is crucial for the proper functioning of insurance, as it establishes a legitimate basis for the claim and maintains the ethical integrity of the insurance industry.