What does “insurable interest” mean?
When you put in something with insurable interest, you can protect it from losing money. When someone or something loses money or causes other problems, if it gets damaged or lost, that person or thing has an II in that thing, event, or action.
A person or thing would have an insurable interest if they bought insurance to protect the person, thing, or event. If something were to happen to the asset, like it getting damaged or lost, the insurance policy would lower the chance of loss.
For an insurance policy to be issued, there must be an insurable interest in the organization or event that makes it legal, valid, and protected against acts that are done on purpose to hurt it. People who are not likely to lose money do not have an II. This means that a person or organization can’t buy insurance to protect themselves if they don’t personally stand to lose money.
How to Understand Insurable Interest
Insurance is a way to spread out risk and keep policyholders from losing money. Insurers have developed many tools to cover losses caused by car repairs, medical bills, and lost wages due to injury, death, and property damage.
Unless something terrible happens, there is a fair expectation that a person or thing will live or be around for a long time. This is called an insurable interest. Insurable interest protects this person or thing from the risk of losing something. 1 Something like a company might have an insurable interest in its chief executive officer (CEO), or an NFL team might have an insurable interest in its star QB. On top of that, a company may have an insurable interest in its CEOs but not in its regular workers.
Insurable Interest in Property
People with homeowner’s insurance get money to make up for significant financial losses if their home is destroyed by fire or something else. The homeowner has an insurable stake in the home, and losing it would be a terrible loss for the policyholder. It is usual for the homeowner to think they will own the house for a long time. So, the homeowner is protecting themselves against the chance that something unexpected will damage their house.
People can only get home insurance for their home, not the house across the street. People who buy home insurance for a neighbor’s house have a reason to damage that house and get the insurance money. With the right insurance, this kind of temptation wouldn’t exist. This is called moral hazard, which means people have a reason to let or even cause a loss.
The idea of indemnity and the concept of insurable interest
The indemnification principle says that insurance plans should pay policyholders for covered losses, but losses shouldn’t favor or disadvantage policyholders. Insurers should ensure that their plans cover the asset’s value at risk regarding indemnification. When policies aren’t thought out or planned well, they create a moral hazard that raises costs for insurance companies and makes policyholders’ premiums too high to afford.
An Example of Insurable Interest in the Real World
Also, life insurance must have an insurable interest, though this hasn’t always been true. Some people have bought life insurance for old friends or family members just because they think that person is going to die soon. Life insurance rules have changed over time to require a relationship in which the policy owner will lose money if the covered person dies. People who can cause hardship include close family members, blood cousins who live far away, romantic partners, creditors, and business partners. The face value of life insurance plans can’t be more than the value of the insured person’s life. If it does, the indemnity principle would be broken, leading to a moral hazard.
Also, the insured person must be told about any changes made to the coverage. So it was in September 2018 when a couple from California was charged with three counts of insurance fraud to get $1 million in life insurance payments. Peter and Jin Kim, who are married, bought life insurance for one of Mr. Kim’s clients and named Mrs. Kim as the client’s niece as the recipient. On a second policy, Mrs. Kim passed herself off as the policyholder’s sister. Mr. Kim, who is a registered insurance agent, also didn’t tell the company that the client had a terminal illness when he turned in the applications.
Do insurance policies need to have an insurable interest?
Yes. Insurable interest is proof that someone or something would have trouble financially or in some other way if something or someone got damaged or lost. This is looked at during the underwriting process to ensure a straight link. All insurance plans need this kind of proof of an insurable interest.
What does moral risk mean?
A moral hazard happens when someone with insurance wants to cause damage or loss to get their money back from the insurance. For example, someone who is very sick and will not get better may buy life insurance with the knowledge that it will pay out if they die soon after buying it. Having an insurable interest lowers the risk of moral hazard.
Why is it not possible for me to get life insurance for anyone?
You can’t get life insurance on that person unless you have an insurable interest in them. If that’s the case, you could bet on or make money from the deaths of people who would otherwise be random. Family members and people who count on you can often be considered to have an insurable interest. Partners in business, borrowers, and sometimes crucial workers are too.
Conclusion
- All insurance policies are based on an insurable interest, which connects the covered person to the policy owner.
- An insurable interest can be something that, if damaged or lost, would make the policyholder financially poor.
- For the policyholder to have an insurable stake in something, they would have to buy insurance on that thing or person.
- The policy shouldn’t make a moral hazard when an insurer has a financial reason to let a loss happen or even cause it.
