Property and Casualty Insurance Practice Exam

What is the main purpose of insurable interest?

1. To increase policy premiums

2. To allow profit from insurance claims

3. To assess financial risk

4. To ensure genuine interest in the insured property

The correct answer is: To ensure genuine interest in the insured property

The main purpose of insurable interest is to ensure a genuine interest in the insured property. This concept is fundamental to insurance contracts, as it establishes the right of a policyholder to insure an asset or entity. Insurable interest means that the policyholder would suffer a financial loss or hardship if the insured event were to occur. This requirement is critical in preventing insurance from being used as a gambling mechanism; it ensures that only those with a legitimate stake in the property can purchase insurance on it. By having insurable interest, the policyholder is incentivized to take reasonable care of the property being insured because they stand to lose financially if it is damaged or lost. This principle also helps to limit the moral hazard, which is the risk that individuals may take undue risks or act irresponsibly if they know they are insured against loss. Overall, insurable interest serves a vital role in maintaining the integrity of the insurance system and ensuring that insurance operates effectively and ethically.