Property and Casualty Insurance Practice Exam

What is required to have insurable interest?

1. A possibility of gain

2. A chance of financial loss

3. A historical loss

4. A change in ownership

The correct answer is: A chance of financial loss

To establish insurable interest, there must be a chance of financial loss. This concept ensures that the person purchasing insurance has a legitimate stake in the insured item or person's well-being. The rationale behind requiring insurable interest is to prevent moral hazard, wherein individuals might take undue risks if they stand to gain financially from a loss. For instance, if someone owns a property, their financial investment in that property means they would face a financial setback should it be damaged or destroyed, thereby justifying their need for insurance. In contrast, a possibility of gain doesn't directly connect to the principle of risk and loss, as merely wanting to profit from an event does not justify insurance coverage. Historical loss relates to past events and doesn't create a current interest in the property or person. Similarly, a change in ownership does not constitute insurable interest by itself; rather, insurable interest must exist at the time of the insurance contract to align with the potential for containing or mitigating losses.