Why must an insured have an insurable interest in the property insured?

An insured must have an insurable interest in the property insured primarily to prevent wagering on insurance policies. Insurable interest refers to a legitimate interest in the property, where the individual or entity stands to suffer a financial loss if the property were damaged or lost. This principle ensures that insurance is used for its intended purpose, which is to provide protection against actual risk or loss, rather than as a gambling mechanism.

If someone could take out insurance on a property without an insurable interest, it could lead to situations where they might benefit from the destruction of the property, creating a conflict between the insurer’s interests and that of the insured. By requiring insurable interest, the law ensures that insurance contracts are rooted in financial reality, thereby promoting ethical practice in insurance and preventing moral hazard behavior.