What does 'insurable interest' refer to in insurance?

'Insurable interest' refers to a financial stake in the insured item, meaning that the policyholder must have a legitimate interest in the preservation of the subject matter of the insurance policy. This legal concept serves two main purposes in insurance contracts. First, it ensures that the policyholder will suffer a financial loss if the insured event occurs, which helps to prevent moral hazard—where someone might intentionally cause a loss if they stand to gain from it.

Second, insurable interest is a requirement for a valid insurance contract; without it, the contract could be deemed void. To establish insurable interest, an individual must show that they would be negatively impacted financially if the insured item were damaged, lost, or destroyed. For example, homeowners have an insurable interest in their properties because they would incur financial loss if their home were to be damaged.

The other options do not capture the essence of insurable interest. The cost of the insurance premium relates more to the price of coverage rather than the legal and financial stakes involved in the contract. The reputation of the insurer pertains to the company's standing in the market and does not affect the validity of insurable interest. Lastly, while the likelihood of a claim is a related concept, it does not directly define ins