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What is an 'insurable interest' requirement in property insurance, and when must it exist?

Reviewed by Jordan Morley, Editorial Lead at 247SimpleTests. Written by the 247SimpleTests Editorial Team from the official source material cited on every question.

Correct answer

The policyholder must have a financial stake in the property such that they would suffer a loss if it were damaged, and this interest must exist at the time of the loss

  1. A It is never required
  2. B The policyholder must have a financial stake in the property such that they would suffer a loss if it were damaged, and this interest must exist at the time of the loss
  3. C It applies only to life insurance
  4. D It must exist only when the policy is issued, not at loss

Why this is the answer

In property insurance, insurable interest means the policyholder must have a genuine financial stake in the insured property — they would suffer a financial loss if it were damaged or destroyed. Unlike life insurance (where insurable interest is needed at policy inception), in property insurance the insurable interest must exist at the time of the loss, because that is when indemnification is measured. Examples of insurable interest include ownership, a mortgage lender's interest, or a tenant's interest in improvements. This requirement prevents wagering on property one has no stake in. Understanding when insurable interest must exist (at the time of loss for property) is commonly tested.
Source: NAIC Model Outline, Insurable Interest, Property

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About this topic: Property Insurance Basics

Property insurance basics cover insurable interest, direct and indirect loss, named-peril versus open-peril forms, valuation methods and the conditions common to every property policy. This is one of 5 Property Insurance questions on property insurance basics, each with a full explanation on a single study page.

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