What is insurable interest in the context of insurance?

Insurable interest refers to a financial stake or an economic interest in the property or subject matter being insured. In the context of insurance, it is essential for an individual or entity to have this interest at the time a loss occurs. This principle ensures that the insured stands to suffer a financial loss if the insured property is damaged or lost, thereby validating the need for insurance coverage.

Answering with the focus on financial risk highlights that for an insurance contract to be legitimate, the insured must face a potential financial detriment if a specific event happens. This requirement acts as a check against moral hazard, where an individual might otherwise have an incentive to cause a loss if they do not stand to lose from the event occurring.

The context of insurable interest helps prevent situations where individuals could insure items they do not own or for which they have no financial stake, fostering a sense of security in the insurance process and protecting the insurer from fraudulent claims. Hence, the financial risk at the time of loss is a cornerstone principle of insurance contracts.