South Carolina Personal Lines Practice Exam

What does Insurable Interest refer to?

1. The ability to receive insurance payouts

2. The risk of financial loss

3. The benefits of being insured

4. The value of property owned

The correct answer is: The risk of financial loss

Insurable Interest refers to the financial stake a person or entity has in the insured property or life. This concept establishes that the person seeking insurance will suffer a financial loss if the insured item is damaged, destroyed, or lost. Therefore, to take out an insurance policy, the insured must have a legitimate interest in the preservation or value of the property or person being insured. In the context of the choices provided, the concept of insurable interest is directly related to the risk of financial loss. If an individual has an insurable interest in an item, it signifies that they stand to lose financially if an unexpected event occurs that impacts that item. This fundamental requirement ensures that insurance serves its primary purpose – to compensate for actual losses rather than to create a profit from someone else's misfortune.