Insurable Interest

Insurable Interest

Insurable interest is a legal and financial requirement that a person or entity must have a stake in an item, event, or life such that its damage, loss, or death would cause them financial loss or hardship. Insurance exists to protect against real economic consequences, not to enable profit from someone else’s misfortune.

How it works

• A valid insurance policy requires a demonstrable link between the policyholder and the insured subject (property, person, or risk).
• Insurers assess insurable interest during underwriting to ensure the policyholder would suffer loss if the insured event occurs.
• The presence of insurable interest reduces moral hazard—situations where someone might be incentivized to cause or hasten a loss to collect insurance proceeds.

Common examples

• Homeowner: has an insurable interest in their own house; cannot insure a neighbor’s home.
• Business: may insure key employees (e.g., a CEO or star athlete) when the business would suffer financially from their loss.
• Creditors: can insure collateral or take insurance to protect against borrower default or loss of secured assets.
• Family members and dependents: typically have insurable interest in one another’s lives.

Importance in homeowners and property insurance

Homeowners insurance exists because losing the home would create substantial financial hardship for the owner. Allowing unrelated parties to insure a property would create incentives to cause damage and increase fraud and claims costs. Proper underwriting and the insurable interest requirement help align insurance with the principle of indemnity—compensating loss, not rewarding gain.

Connection to the principle of indemnity

The indemnity principle holds that insurance should restore the policyholder to their pre-loss financial position, not provide a windfall. Requiring insurable interest ensures payouts reflect actual economic loss and helps keep premiums sustainable by limiting exposure to opportunistic claims.

Life insurance considerations

• Life insurance typically requires the policy owner to have an insurable interest in the insured at the time the policy is issued—meaning the owner would suffer financially if the insured died.
• Acceptable relationships include immediate family members, dependents, business partners, creditors, and key employees in some cases.
• Insuring unrelated strangers without a legitimate insurable interest is generally prohibited because it would effectively allow wagering on lives and increase moral hazards.

Fraud and abuse risks

Insurable interest requirements and rules that the insured be aware of a policy’s existence help prevent abuses such as:
* Purchasing policies on strangers who are near death to collect proceeds.
* Concealing material facts to obtain coverage or inflate payouts.
Legal safeguards and proper underwriting reduce these risks.

Key takeaways

• Insurable interest is a foundational requirement for valid insurance: the policyholder must face real financial loss if the insured event occurs.
• It preserves the indemnity purpose of insurance and mitigates moral hazard and fraud.
• Insurable interest is evaluated during underwriting and varies by type of insurance and the relationship between parties.