Definition of ‘Insurable Interest’
An economic stake in an event for which an insurance policy is purchased to mitigate risk of loss. An insurable interest is a basic requirement for an insurance company to issue a policy. Entities not subject to financial loss from an event do not have an insurable interest and cannot purchase an insurance policy to cover that event. Insurable interest is what makes an insurance contract legal and valid, and protects against intentionally harmful acts.
Investopedia explains ‘Insurable Interest’
Jane can purchase homeowners insurance for the house she owns because she would suffer a major financial loss if her home were destroyed by a fire. She has an insurable interest in the property; an insurance policy will protect her against a loss that she cannot afford to – or does not want to – bear.
Jane cannot purchase homeowners insurance for her neighbor’s house. She does not have an insurable interest in that property because she does not own it. If the neighbor’s house burns down, and the fire does not harm Jane’s property, Jane has not suffered any insurable loss. If Jane were able to purchase homeowners insurance for her neighbor’s house, it would be in her best interest to burn down the house and collect the insurance proceeds, whereas it would not be in Jane’s best interest to burn down her own home.
In addition, if Jane sells her house and it burns down the day after she transfers ownership – but before she has a chance to cancel her homeowners insurance policy – she will not be able to file a claim because she no longer has an insurable interest in the property. It is the new owner, not Jane, who suffers the financial loss from the fire.