South Carolina Personal Lines Practice Exam

What does the term “insurable interest” refer to?

1. A party's ability to pay premiums

2. A requirement for eligibility to purchase insurance

3. The financial stake in the subject of the insurance policy

4. The geographic location of the insured property

The correct answer is: The financial stake in the subject of the insurance policy

The term “insurable interest” refers specifically to the requirement that a person or entity must have a financial stake in the subject of the insurance policy. This means that the insured must stand to suffer a financial loss or hardship if the covered event occurs, such as damage to property or liability for injury. The concept protects the insurance industry from moral hazard, as it prevents individuals from taking out policies on items or lives in which they have no genuine interest, thus reducing the potential for fraud. For example, if a homeowner insures their house, they have an insurable interest because they would encounter a financial loss if the home were to be damaged or destroyed. This requirement is critical in ensuring that all parties engaged in the insurance contract have a legitimate reason for obtaining coverage, which in turn supports the intended purpose of insurance as a risk management tool.