Insurable Interest

What is an 'Insurable Interest'

An insurable interest is 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. Personal Lines Insurance

    Property and casualty insurance products for individuals that ...
  2. Cover Note

    A temporary document issued by an insurance company that provides ...
  3. Insurance Industry ETF

    A sector-following fund that invests primarily in insurance companies, ...
  4. As Their Interests May Appear (ATIMA)

    Text in an insurance policy that allows other parties to be added ...
  5. Insurance Proceeds

    The benefit proceeds paid out by any type of insurance policy ...
  6. Transfer Of Risk

    The underlying tenet behind insurance transactions. The purpose ...
Related Articles
  1. Home & Auto

    Intro To Insurance: Fundamentals Of Insurance

    By Cathy ParetoHow does insurance work? Insurance works by pooling risk.What does this mean? It simply means that a large group of people who want to insure against a particular loss pay their ...
  2. Insurance

    Explaining Insurance

    Insurance is a form of contract between an individual and an insurance company that spreads risk in exchange for premium payments.
  3. Insurance

    Understanding Your Insurance Contract

    Learn how to read one of the most important documents you own.
  4. Investing Basics

    The Industry Handbook: The Insurance Industry

    As a result of globalization, deregulation and terrorist attacks, the insurance industry has gone through a tremendous transformation over the past decade. In the simplest terms, insurance of ...
  5. Home & Auto

    Bundle Your Insurance For Big Savings

    Bundling your insurance can save you money and time. Read on to see how get the most out of multiline insurance discounts.
  6. Home & Auto

    The History Of Insurance In America

    Insurance was a latecomer to the American landscape, largely due to the country's unknown risks.
  7. Professionals

    The Legal Aspects of Insurance

    The Legal Aspects of Insurance
  8. Home & Auto

    Intro To Insurance: Conclusion

    By Cathy ParetoInsurance is an integral part of any personal financial plan. The type of insurance and the amount of coverage you obtain all depends on your unique financial and family circumstances, ...
  9. Insurance

    What Happens If Your Insurance Company Goes Bankrupt?

    When insurance companies go bankrupt or face financial difficulty, it's bad news for policy holders.
  10. Home & Auto

    Exploring Advanced Insurance Contract Fundamentals

    Understanding your contract can help you protect our family's financial security.
RELATED FAQS
  1. What is the average return on total revenue for the insurance sector?

    Learn about the three main segments of the insurance industry, and find out what the average return on revenues is for the ... Read Answer >>
  2. Can your insurance company cancel your policy without notice?

    Learn about your rights as an insured when it comes to your insurance policy being canceled, including how to access your ... Read Answer >>
  3. What's the difference between renter's insurance and homeowner's insurance?

    Renters insurance and homeowners insurance offer similar benefits for occupants and homeowners, but in different ways and ... Read Answer >>
  4. What are some examples of when insurance bundling is a bad idea?

    Learn about situations where insurance bundling may not be a favorable option. Bundling insurance is often a good idea, but ... Read Answer >>
  5. What are some examples of industries that practice price discrimination?

    Understand the various types of insurance coverage offered in the insurance marketplace, and learn why each policy should ... Read Answer >>
  6. What are examples of the largest companies in the insurance sector?

    Read about some of the largest and most influential companies in the insurance sector, a list that includes Berkshire Hathaway ... Read Answer >>
Hot Definitions
  1. Return On Invested Capital - ROIC

    A calculation used to assess a company's efficiency at allocating the capital under its control to profitable investments. ...
  2. Law Of Demand

    A microeconomic law that states that, all other factors being equal, as the price of a good or service increases, consumer ...
  3. Cost Of Debt

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
  4. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  5. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  6. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
Trading Center