What defines "insurable interest"?

The concept of "insurable interest" is critical in insurance and is defined as a legal right to insure a person or property. This means that in order for an individual or entity to obtain an insurance policy, they must have a stake in the insured party or property that could result in financial loss or detriment in the event of a covered loss. This principle is central to insurance because it ensures that the policyholder has a genuine interest in the preservation and well-being of what is insured, preventing moral hazard where someone might seek to benefit from a loss they do not have a legitimate stake in.

For example, a property owner has an insurable interest in their own home because if the home were to be damaged or destroyed, they would suffer a financial loss. Similarly, a business can only insure its own inventory, as it has a vested interest in that inventory's safety and value. This legal right is what justifies the payment of insurance premiums and the handling of claims afterward.

Other options, such as having ownership of insurance policy documents, are not sufficient to establish insurable interest. Legal documentation serves a different purpose, primarily indicating coverage rather than the stake in the property or person insured. Physical possession of the insured property might imply certain rights, but