Insurable interest

Insurable interest exists when an insured person derives a financial or other kind of benefit from the continuous existence, without impairment or damage, of the insured object (or in the case of a person, their continued survival). A person has an insurable interest in something when loss of or damage to that thing would cause the person to suffer a financial or other kind of loss.

Typically, insurable interest is established by ownership, possession, or direct relationship. For example, people have insurable interests in their own homes and vehicles, but not in their neighbors' homes and vehicles, and certainly not those of strangers.

The "factual expectancy test" and "legal interest test" are the two major concepts of insurable interest.

The development of the concept of insurable interest as a prerequisite for the purchase of insurance distanced the insurance business from gambling, thereby enhancing the industry's reputation and leading to greater acceptance of the insurance industry. The United Kingdom was a leader in that trend by passing legislation that prohibited insurance contracts if no insurable interest could be proven, notably the Life Assurance Act 1774 which renders such life insurance contracts illegal, and the Marine Insurance Act 1906, s.4 which renders such contracts void.

People have an insurable interest in their property up to the value of the property, but no more. The principle of indemnity dictates that the insured be compensated for a loss of property, but not paid more than what the property was worth. A lender who grants a mortgage on the security of a house has an insurable interest in that house, but only up to the amount outstanding on the loan.

Insurable interest refers to the right of property to be insured. It may also mean the interest of a beneficiary of a life insurance policy to prove need for the proceeds, called the "insurable interest doctrine". Specifically, insurable interest is:

Insurable interest is no longer strictly an element of life insurance contracts under modern law. Exceptions include viatication agreements and charitable donations.

The principle of insurable interest on life insurance is that a person or organization can obtain an insurance policy on the life of another person if the person or organization obtaining the insurance values the life of the insured more than the amount of the policy. In this way, insurance can compensate for loss. A company may have an insurable interest in a President/CEO or other employee with special knowledge and skills. A creditor has an insurable interest in the life of a debtor, up to the amount of the loan. A person who is financially dependent on a second person has an insurable interest in the life of that second person.

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Wikipedia