What is 'insurable interest' in insurance contracts?

Insurable interest is fundamentally the requirement that an individual or entity must have a valid stake in the insured property or person in order to purchase an insurance policy. This means that the insured must stand to gain financially if the insured event does not occur or suffer a loss if it does. In practical terms, this principle helps to prevent moral hazard, where someone might deliberately cause a loss in order to collect insurance benefits.

By requiring an insurable interest, insurance contracts ensure that policyholders have a genuine interest in the safety and preservation of the property or person they are insuring. If insured individuals could purchase policies on anything without having a stake in it, it could lead to increased fraudulent claims and abuse of the insurance system.

Therefore, the idea that an insured can benefit financially from the policy aligns perfectly with the definition of insurable interest, making it the correct choice for understanding this vital concept in insurance contracts.