What does it mean to have insurable interest?

Having insurable interest means that a person or entity has a legitimate financial stake in the subject of the insurance policy, such that a loss or damage to that subject would result in a financial loss to them. This concept is essential in the insurance industry to prevent moral hazard, which occurs when an insured party might act recklessly because they do not bear the financial consequences of their actions, knowing they could just claim insurance for the loss.

For instance, a homeowner has an insurable interest in their home because if the house were to be damaged or destroyed, they would suffer a financial loss. Similarly, a business owner has an insurable interest in their business assets, as any loss would directly impact their financial standing.

The other options present concepts that, while related to insurance, do not encapsulate the essence of insurable interest. For example, claiming insurance amounts, policy coverage limits, or determining responsibility for damages, all do not reflect the core idea that insurable interest revolves around the financial impact of loss or damage on the insured party.