Insurable Interest

The National Association of Insurance Commissioners (NAIC) defines Insurable Interest as, “[a] right or relationship in regard to the subject matter of the insured contract such that the insured can suffer a financial loss from damage, loss, or destruction to it."

So what does this mean? It would be easier to understand it if we break it down one part at-a-time.

“A right or relationship in regard to the subject matter” means that you either: (1) own the subject matter, or (2) have the right to use it (the subject matter). An example of this would be your car. The car would be the “subject matter,” and your "right" or "relationship" to the car, is that you own it.

“Of the insured contract” describes the insurance policy itself. For example, if you purchase insurance covering your car, in case of an accident. The insurance policy you purchased is described by the phrase "of the the insured contract."

“Such that the insured” modifies the person that purchased the insurance policy. Said differently, it is the person seeking indemnification from the risk of realizing a loss. This phrase also sets up the next part of the definition, such that it introduces what can happen to the insured.

“Can suffer a financial loss from damage, loss, or destruction to it.” This final phrase closes the loop on all previous phrases. It sets forth that the person that has a "right to the subject matter" must realize a "financial loss." For example, suppose your car is worth $30,000. If it is ever in accident, and it would cost $10,000 to fix it, your car would now be worth $20,000. Where we see that there was a reduction in the value of your car, because it was in an accident, you will have realized a "financial loss."

Putting it all together, someone would only have “suffered a financial loss” if they had a “right or relationship in regard to the subject matter.” In contrast to the example above, if the $30,000 car belonged to your friend, then your friend would realize the $10,000 reduction in value of the car, not you.

In summary, for someone to have insurable interest they must be in a position to realize a "financial loss" in the event of an accident, loss, or destruction of their property.

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