What is necessary for an insurable interest to exist?

For an insurable interest to exist, it is essential to have a financial interest in the insured entity. This means that the individual or entity seeking insurance must stand to suffer a financial loss if the insured property or person is damaged, lost, or harmed. The foundation of insurable interest lies in the principle that insurance is intended to indemnify against losses rather than to provide a windfall profit.

In a situation where a person has an insurable interest, they have a legitimate stake in the preservation of the insured item or individual, which helps to prevent moral hazard situations where a person might intentionally cause harm to benefit financially from an insurance payout. This requirement is fundamental to the validity of an insurance contract and ensures that the party buying insurance has a real and legitimate need for that protection.

Other options like a signed agreement from all parties or a verbal agreement between friends do not establish a direct financial stake or interest, while a lease or rental agreement may imply some level of interest, it is not universally applicable in the same way as having a clear financial interest directly in the insured entity.