What Is Insurable Interest?

An individual has an insurable interest in something if he or she would suffer greatly financially or otherwise if it were damaged or destroyed. The insured has a stake in the item or property and does not want to see it damaged in any way. It is because of this insurable interest that individuals purchase insurance coverage on their property in the first place. In order to have an insurable interest, you have to stand to lose something if the insurance coverage were not in place.

Example

If you own a nice car and it is damaged in a wreck, the value of the car would suffer significantly. In some cases, the car would be totaled, and it would be worth only the price of the scrap metal and parts. In that case, you would suffer financially because you could no longer sell the car for the value that it had before the wreck. This means that you have an insurable interest in the car. By contrast, if your friend's car was in a wreck, you would feel bad for him or her that the car was damaged, but you would not necessarily have any stake in the car. For this scenario, you would not have an insurable interest. You have to have the potential to be harmed in some way in order to have an insurable interest in a piece of property. 

Indemnity

Another concept that goes along with insurable interest is indemnity. This concerns the idea that an individual should not profit from this type of insurance coverage when an item is damaged. When someone has insurance, he or she is entitled to receive the full value of the piece of property if it is destroyed. However, he or she is not entitled to receive anything more than that value. For example, if your house were destroyed in a fire, you would be able to receive the fair market value of that house back in cash from the insurance company. You would not be able to receive the fair market value plus an additional amount of money, however. With indemnity, you get back to where you were before the accident but not any further.

Life Insurance

Life insurance is sold because of another person's insurable interest in a life. The person who passes away would obviously lose his or her life, but the beneficiary of the life insurance policy would also suffer. This means that the beneficiary has an insurable interest in the life of the policyholder. 

If the person that died was the primary income earner for the household, the life insurance company would pay an amount of money to make up for this lack of income. In addition to the financial loss, the beneficiary would suffer in an emotional way because of the loss of the loved one. The death benefit is designed to cover both of these aspects of the beneficiary's insurable interest.

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