Insurable Interest

AAA

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.

INVESTOPEDIA EXPLAINS '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. Occupational Safety And Health ...

    Law passed in 1970 to encourage safer workplace conditions in ...
  4. Investment Income Ratio

    The ratio of an insurance company’s net investment income to ...
  5. Insurance Premium

    The amount of money that an individual or business must pay for ...
  6. Independent Agent

    An insurance agent that sells insurance policies provided by ...
Related Articles
  1. Insurance

    With HO5 Insurance, You're In Charge

    This home insurance covers everything and will put the onus on your insurance provider.
  2. If you become injured and no longer able to work, would your business survive?
    Insurance

    Disability Insurance For Business Owners

    If you become injured and no longer able to work, would your business survive?
  3. 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.
  4. 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.
  5. If you decide to sign up for long-term care insurance, it's generally best to do so in your mid-50s.
    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.
  6. Here's what you need – and don't need
    Insurance

    Insurance for Millennials

    Four insurance must-haves – and one maybe – for Generation Y
  7. Technical Indicators

    What is a good gearing ratio?

    Understand the meaning of the gearing ratio, how it is calculated, the definition of high and low gearing, and how they reflect relative financial stability.
  8. Investing

    What are the risks associated with investing in telecommunication stocks

    Read about some of the risks associated with investing in telecommunication stocks, including several that are specific to the telecom industry.
  9. Fundamental Analysis

    What is a good interest coverage ratio?

    Learn the importance of the interest coverage ratio, one of the primary debt ratios analysts use to evaluate a company's financial health.
  10. Fundamental Analysis

    What is a bad interest coverage ratio?

    Understand how interest coverage ratio is calculated and what it signifies, and learn what market analysts consider to be an unacceptably low coverage ratio.

You May Also Like

Hot Definitions
  1. Multinational Corporation - MNC

    A corporation that has its facilities and other assets in at least one country other than its home country. Such companies ...
  2. SWOT Analysis

    A tool that identifies the strengths, weaknesses, opportunities and threats of an organization. Specifically, SWOT is a basic, ...
  3. Simple Interest

    A quick method of calculating the interest charge on a loan. Simple interest is determined by multiplying the interest rate ...
  4. Special Administrative Region - SAR

    Unique geographical areas with a high degree of autonomy set up by the People's Republic of China. The Special Administrative ...
  5. Annual Percentage Rate - APR

    The annual rate that is charged for borrowing (or made by investing), expressed as a single percentage number that represents ...
  6. Free Carrier - FCA

    A trade term requiring the seller to deliver goods to a named airport, terminal, or other place where the carrier operates. ...
Trading Center