What does "insurable interest" refer to in an insurance context?

In the insurance context, "insurable interest" refers to the financial interest of an insured individual in the subject of the insurance policy. This principle is fundamental because it establishes that the policyholder must stand to suffer a financial loss if the insured property is damaged, destroyed, or lost. It reinforces the idea that insurance is meant to protect individuals from actual financial setbacks rather than to facilitate speculative investments.

The requirement for insurable interest ensures that the person taking out the insurance has a legitimate stake in the property or life insured, which helps prevent moral hazard—where individuals might otherwise take risks because they do not have a direct financial consequence. For instance, a homeowner has an insurable interest in their home because they would incur a financial loss if it were to be destroyed. Similarly, a business has an insurable interest in its assets, as their loss would directly affect the company's financial stability and operations.

Understanding insurable interest is key to grasping how insurance contracts function, as it delineates the relationship between the policyholder and the subject matter of the insurance. Without this interest, an insurance contract would not be valid.