DID you know you can't buy insurance for just anyone... or a cover for an asset owned by someone? For example, an individual's application to insure his cousin's life was rejected. Insurance companies cited "lack of insurable interest" as a reason for rejecting the application. Insurable interest is one of the key principles of insurance.
A person has an insurable interest in something when loss or damage to it will cause that person to suffer a financial loss or some other kind of losses. For example, if the car you own meets with an accident, you have to incur costs to repair the car before you can ply it again or you have to sell it in scrap and be content with getting too small a sum in return to replace your car. Here, you suffer a financial loss and, hence, have a strong reason to insure your car. If the accident happens with a car not owned by you, you do not suffer any financial loss. You do not have a reason to insure such a car. If a 'reason' exists, you are said to have an insurable interest in the subject of insurance.
As a rule of thumb, for property insurance, the insurable interest must exist both at the time of purchase of insurance and at the time of occurrence of loss. For life insurance, the insurable interest must exist at the time of purchasing life insurance. An individual is said to have an insurable interest in his own life and that of his spouse. The concept of insurable interest ensures that none gambles on someone else's life or property. It also prevents the moral hazard of an individual buying insurance of a subject and then 'arranging' for the occurrence of insured event.
Insurable interest not only bans many 'speculative' transaction but also makes some insurance transactions possible.
