What is an "insurable interest"?

An insurable interest refers to the legal and financial interest that a policyholder must have in the subject of the insurance coverage. This concept ensures that the person who purchases an insurance policy is doing so because they would suffer a financial loss or hardship if the insured event occurs. This requirement is in place to prevent people from taking out policies on lives or property in which they have no legitimate interest, which could lead to immoral outcomes, such as individuals benefiting from another's death or misfortune. Having an insurable interest is foundational to the principles of insurance and is necessary for a valid contract between the insurer and the insured.

While the financial gain from the insured event, the right to assign a policy, and risk management strategies are all related to insurance in some way, they do not define the concept of insurable interest itself. Insurable interest specifically addresses the necessity of a relationship between the policyholder and the subject of the insurance, establishing a legitimate reason for the policyholder to want to protect that interest.