What Is Insurable Interest in Insurance?
Insurable interest is one of the most important concepts in insurance. It’s what makes you eligible to buy insurance, and it’s also what makes an insurer legally obligated to pay claims on your behalf. Simply put, it is your right (and often financial interest) to be insured.
But insurable interest isn’t just any old financial interest; rather, it’s a very specific type of interest that must be met in order for an insurance policy to be valid. To understand insurable interest, you need to know what it is and how it’s defined.
The Importance of Insurable Interest
Insuring your property and possessions is important, not just for peace of mind, but also for economic reasons. If something happens, you’ll need insurance to help you make up for your losses.
You might buy fire insurance if you own a home, renter’s insurance if you live in an apartment or condominium, or auto insurance if you have a car that you use regularly. You may even want errors and omissions insurance (also called E&O insurance) if you’re a business owner.
All of these types of insurance are only available to people who have an insurable interest—that is, they have something at stake in the policy they purchase. Without insurable interest, they would not be allowed to buy the coverage.
Three Types of Insurable Interest
There are three types of insurable interest:
- Personal interest: This is the most common type of insurable interest and applies when you have a financial stake in the policy. For example, if you buy car insurance, your personal interest would be the damage or destruction of the car.
- Property interest: This type of insurable interest applies when you have an ownership stake in the property that’s being insured. For example, if you own a home and buy fire insurance, your property interest would be the damage or destruction of the home.
- Casualty interest: This type of insurable interest applies when you’re injured or suffer a loss as the result of an accident or event. For example, if you’re in a car accident and buy auto insurance, your casualty interest would be the injuries you suffer in the accident.
How to Establish Insurable Interest
In order to establish insurable interest, you must show that you have something at stake in the policy. This can be done in a number of ways:
- Ownership: You can establish insurable interest by showing that you own the property or asset that’s being insured.
- Employment: If you’re employed by a company and the company purchases insurance, you may have an insurable interest in the policy. This is because your job is at stake if something happens to the company.
- Financial interest: You can also establish insurable interest by showing that you have a financial stake in the policy. For example, if you’re the beneficiary of a life insurance policy, you have a financial interest in the policy.
- Relationship: You can also establish insurable interest by showing that you have a relationship with the person or entity that’s being insured. For example, if you’re the spouse of the policyholder, you have a relationship with the policyholder and therefore have an insurable interest.
The Bottom Line
Insurance is an important tool for protecting your property and possessions. In order to be eligible to buy insurance, you must have an insurable interest in the policy.
This means you must have something at stake in the policy if something happens. There are three types of insurable interest: personal, property, and casualty.
To establish insurable interest, you must show that you have a financial stake in the policy. This can be done in a variety of ways, such as ownership, employment, or financial interest. You can also establish insurable interest by showing that you have a relationship with the person or entity that’s being insured.
By understanding what insurable interest is and how to establish it, you’ll be able to make better decisions about your insurance policy.
Disclaimer: The above references an opinion and is for information purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice.
About the Author
True Tamplin, BSc, CEPF®
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.