What is the primary purpose of having an insurable interest in an insurance policy?

The primary purpose of having an insurable interest in an insurance policy is to safeguard against moral hazard. Insurable interest refers to the requirement that the policyholder must have a legitimate interest in the preservation of the insured property or life. This means that the insured would suffer a financial loss or hardship if the insured event occurs.

By ensuring that the policyholder has a genuine stake in the subject matter of the insurance, insurers reduce the incentive for the policyholder to engage in risky behavior or to intentionally cause loss or damage, which could lead to fraudulent claims. Having this requirement helps maintain the integrity of the insurance contract and aligns the interests of the insured and insurer, fostering a sense of responsibility towards the insured item or individual. Thus, the inclusion of insurable interest establishes a reasonable expectation of honesty and ethical behavior in the insurance transaction.