What is Insurable Interest?
Insurable Interest is a financial stake or potential loss that a person or entity would face if an insured event occurs. It refers to an investment that helps in prevention of anything that is subject to a loss.
Insurable interest is a key principle in insurance that ensures the policyholder has a legitimate interest in the continued existence or preservation of the insured item or person. Without insurable interest, an insurance contract may be deemed void as it could encourage speculative risk rather than providing genuine protection.
An insurance policy needs to be taken to have an insurable interest for any person, asset, item etc.
Examples of Insurable Interest
- Property Insurance Example: A homeowner purchases homeowner’s insurance for their house. The homeowner has insurable interest because they own the property and would suffer a financial loss if it were damaged or destroyed. Similarly, a landlord has insurable interest in rental properties due to potential financial loss from damage or loss of rental income.
- Life Insurance Example: A person takes out a life insurance policy on their spouse. They have insurable interest because the death of their spouse would cause them financial and emotional distress. Additionally, a business partner insures their partner’s life, as the death could impact the financial stability of the business.
Principle of Indemnity
The Principle of Indemnity ensures that insurance compensates you for your actual loss, but not more. It aims to restore you to the financial position you were in before the loss occurred, without allowing you to profit from the insurance.
For example: If your car worth ₹5 lakhs is damaged and insured, the insurance will cover repairs or replacement up to ₹5 lakhs. If you have a ₹6 lakhs claim, the insurer will only pay ₹5 lakhs, as that’s the maximum value of your car.
If any policy is not strategically designed it will lead to moral hazard, which may expand the cost for insurance companies. For the prevention, the principle of indemnity is followed.
