An insurance policy is, at its core, a type of contract: it represents an agreement between two or more parties in which one party, the insured, pays a specific sum to the other, the insurer, in exchange for something of value. In the case of an insurance contract (or policy), that thing of value is the insurer’s “indemnification” – a promise to help cover loss, damage or liability – for covered losses incurred as a result of certain risks, contingencies or occurrences specified under the contract. For such an agreement to be judicially enforceable, the insured must have an “insurable interest” in the property insured.
What constitutes an insurable interest? A person or entity has an insurable interest in an item, event or action when the damage or loss of the object would cause a financial loss or other hardships. The simplest example of an insurable interest would be your home and its contents. You would suffer a financial hardship if your home burnt to the ground and all of your property was destroyed. This insurable interest allows you to purchase an insurance policy on your home, car and personal property. However, you cannot purchase an insurance policy on your neighbor’s home. Why not? Because you will suffer no financial hardship if their home burns to the ground.
A person does not need to own the building to have an insurable interest. A tenant in a large building has an insurable interest in the property to the extent that, if the building is damaged and they can no longer run their business, they will suffer a financial hardship. A tenant may purchase an insurance policy for their financial hardship, but may NOT purchase a policy for the entire building – unless legal documents require them to do so.
There have been some strange cases involving insurable interest. For example, one must not only have an insurable interest in the property at the time the policy was purchased, but also must have an insurable interest at the time of the loss. We know of a woman who had taken out an insurance policy at the inception date, who then got divorced during the course of the policy period. Part of the agreement was that the house would become the husband’s property. The husband purchased a policy at the time of the divorce. And prior to the first policy ending, the house had a loss. The husband was able to collect, but the wife could not because she did not have an insurable interest at the time of the loss.
We hope you found this little primer on “insurable interest” of interest. We’ll check back with more helpful terms in the future.