Insurable Interest

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.

BREAKING DOWN '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.

RELATED TERMS
  1. Guaranteed Issue Life Insurance

    A type of financial-protection policy that provides cash to a ...
  2. Private Mortgage Insurance - PMI

    A policy provided by private mortgage insurers to protect lenders ...
  3. Negative Interest Rate Policy (NIRP)

    A negative interest rate policy (NIRP) is an unconventional monetary ...
  4. Great Society

    Born in the turbulent sixties, the Great Society was President ...
  5. Tight Monetary Policy

    A course of action undertaken by the Federal Reserve to constrict ...
  6. Bankruptcy

    A legal proceeding involving a person or business that is unable ...
Related Articles
  1. Insurance

    Getting Life Insurance in Your 20s Pays Off

    Find out how Americans in their 20s can benefit from a well-thought-out life insurance policy, especially if they are able to build cash value for retirement.
  2. Insurance

    With HO5 Insurance, You're In Charge

    This home insurance covers everything and will put the onus on your insurance provider.
  3. Insurance

    Disability Insurance For Business Owners

    If you become injured and no longer able to work, would your business survive?
  4. Insurance

    Pay Less For Medicine By Not Using Health Insurance

    You might be paying more for your prescriptions at the pharmacy if you use your health insurance than if you pay cash out of pocket.
  5. Insurance

    7 Reasons You Have a Love-Hate Relationship With Home Insurance

    What is covered in a policy can vary widely by company, so you’d better know what to look for when shopping for home insurance.
  6. Insurance

    What's the Best Time to Get Long-Term Care Insurance?

    Consider applying for long-term care insurance much sooner than you'll need it. If you wait too long, premiums will likely be much higher or you may be denied altogether.
  7. Insurance

    Insurance for Millennials

    Four insurance must-haves – and one maybe – for Generation Y
  8. Investing News

    This Is Why Every Chipotle Is Closed for One Day

    Chipotle Mexican Grill Inc. (CMG) has had a rough year when it comes to food safety. Management is hoping that closing all locations for a company-wide meeting Monday will help resolve the issues ...
  9. Credit & Loans

    What is an Alt-A Mortgage?

    Called "liar loans" for their low documentation requirements, Alt-A mortgages were hot until the subprime crisis. Now Wall Street wants to bring them back.
  10. Credit & Loans

    A FICO-free Loan? See SoFi's Super Bowl Ad

    Non-bank lender SoFi will air its first TV ad during Super Bowl 50. Here's how it's challenging big banks by providing an alternative approach to loans.
RELATED FAQS
  1. What is arbitrage?

    Arbitrage is basically buying in one market and simultaneously selling in another, profiting from a temporary difference. ... Read Full Answer >>
  2. What is Fibonacci retracement, and where do the ratios that are used come from?

    Fibonacci retracement is a very popular tool among technical traders and is based on the key numbers identified by mathematician ... Read Full Answer >>
  3. What is a derivative?

    A derivative is a contract between two or more parties whose value is based on an agreed-upon underlying financial asset, ... Read Full Answer >>
  4. What is finance?

    "Finance" is a broad term that describes two related activities: the study of how money is managed and the actual process ... Read Full Answer >>
  5. What items are considered liquid assets?

    A liquid asset is cash on hand or an asset that can be readily converted to cash. An asset that can readily be converted ... Read Full Answer >>
  6. What is comparative advantage?

    Comparative advantage is an economic law that demonstrates the ways in which protectionism (mercantilism, at the time it ... Read Full Answer >>
Hot Definitions
  1. Super Bowl Indicator

    An indicator based on the belief that a Super Bowl win for a team from the old AFL (AFC division) foretells a decline in ...
  2. Flight To Quality

    The action of investors moving their capital away from riskier investments to the safest possible investment vehicles. This ...
  3. Discouraged Worker

    A person who is eligible for employment and is able to work, but is currently unemployed and has not attempted to find employment ...
  4. Ponzimonium

    After Bernard Madoff's $65 billion Ponzi scheme was revealed, many new (smaller-scale) Ponzi schemers became exposed. Ponzimonium ...
  5. Quarterly Earnings Report

    A quarterly filing made by public companies to report their performance. Included in earnings reports are items such as net ...
Trading Center