What is the principle of "insurable interest" in insurance?

The principle of "insurable interest" in insurance is fundamentally based on the idea that the policyholder must have a financial stake in the insured item. This means that the policyholder stands to suffer a financial loss if the item were to be damaged or lost. For example, a homeowner has insurable interest in their house because they would incur a financial loss if it were damaged.

This principle serves multiple purposes: it prevents moral hazard by ensuring that individuals are not incentivized to intentionally cause loss or damage as they would not benefit financially from such actions. It also reinforces the idea that insurance is a mechanism to protect one’s legitimate financial interests rather than a means for speculative gain.

The other options, while related to insurance, do not accurately reflect the core principle of insurable interest. Benefit from taking insurance may be a consequence of insurable interest, but it does not encapsulate the primary requirement. Holding multiple insurance policies does not pertain to insurable interest, and being the original owner of an item is not a necessary condition for having insurable interest, as financial interest can exist in various forms beyond ownership. Therefore, having a financial stake in the insured item is the essence of insurable interest.