What does the term 'insurable interest' refer to in insurance?

The term 'insurable interest' refers to a vital principle in insurance that ensures the policyholder has a legitimate interest in the security or preservation of the insured item, meaning they would benefit from the event that they are insuring against not occurring. This principle is intended to uphold the integrity of insurance by preventing individuals from taking out policies on items or lives in which they have no vested interest, which could lead to moral hazard—where the insured party might benefit from the destruction or loss of the insured entity.

In practice, insurable interest typically exists when there is a potential for financial loss as a result of damage or loss to the insured item or person. For example, a homeowner has an insurable interest in their home because they benefit if it remains intact and unharmed.

The other concepts relate to different aspects of insurance but do not define insurable interest itself. Restrictions on coverage, financial valuation of items, or automatic renewal clauses are separate considerations within insurance policies that do not pertain directly to the principle of having a vested interest.