What is an Insurable Interest?

Cite this article as: Jason Mance Gordon, "What is an Insurable Interest?," in The Business Professor, updated January 24, 2015, last accessed March 29, 2020, https://thebusinessprofessor.com/knowledge-base/what-is-an-insurable-interest/.
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What is an Insurable Interest?
This video explains what is an Insurable Interest.

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What is an “insurable interest”?

For a party to seek insurance against a potential loss, the insured must have some form of interest in the insured property or be subject to a particular loss from an occurrence or event affecting the insured property or individual. This is known as having an “insurable interest”. An insurable interest may be any form or legal or equitable interest in the property, including security interests in the property as collateral. Individuals may have an insurable interest in the life of other persons, but the individual whose life is subject to the policy must agree to such coverage. In some situations, contractual rights or the potential to suffer damages from non-performance of a contract may give rise to an insurable interest. This is the case for professional liability coverage.

•    Note: An exception exists to the insurable interest requirement for certain types of financial instruments. These instruments effectively insure against an occurrence in which the holder of the instrument has little or no financial interest.

•    Example: One person cannot take out a life insurance party on a complete stranger without that person’s permission. There must be some special relationship between the individuals to justify the policy. This could be a family or business relationship. In any event, the insured individual must generally agree for the insurer to issue a life insurance policy to a third party. In health and life insurance policies, the individual applying for the policy must have an insurable interest in the insured’s life at the time that the policy takes effect. In property insurance contracts, the individual applying for insurance must have an insurable interest in the property at the time of loss to the covered property.

•    Discussion: Why do you think insurance contracts require that an individual have an insurable interest? Can you think of contracts that are similar to insurance policies that do not require a party to have an insurable interest? Hint: Think of the 2007 economic recession.

•    Practice Question: Amy is a huge fan of a popular singer, Justin. Though she has never met him, she would be distraught if anything were to happen to him. In the event of his untimely demise, she wants to make certain that she would be able to create a shrine and pay homage to the singer. Can Amy take out an insurance policy   covering Justin’s life?

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