What is the significance of having an insurable interest?

Having an insurable interest is crucial because it establishes that the policyholder stands to suffer a financial loss or hardship if the insured event occurs. This concept is fundamental to the validity of an insurance contract. In order to take out an insurance policy, the policyholder must demonstrate an insurable interest in the subject of the insurance. This requirement prevents moral hazard, where an individual might be incentivized to cause a loss if they do not have a vested financial interest in the insured item or person.

Without an insurable interest, the insurance contract may be deemed void, as it would not serve its intended purpose of indemnifying the policyholder against actual losses suffered. Therefore, insurable interest safeguards the integrity of insurance contracts and ensures that insurance is used appropriately.