1.1 Insurable Interest & The Principle of Indemnity
Understand why insurable interest must exist at the time of loss in property insurance, and how the principle of indemnity prevents moral hazard.
Key Blueprint Takeaways
- In property and casualty insurance, insurable interest must exist at the exact time of the loss.
- The principle of indemnity restores the insured to the same financial position they enjoyed immediately prior to the loss, without profit.
- Subrogation transfers recovery rights from the insured to the insurer once a loss is paid.
Insurance is a mechanism for transferring the financial risk of catastrophic loss from an individual or business entity to an insurance company. Central to property insurance is the doctrine of insurable interest: an insured must have a lawful, substantial economic interest in preserving the property from loss.
Unlike life insurance, where insurable interest is required solely at policy inception, property insurance requires insurable interest to exist at the exact moment the damage occurs. If an owner sells a house on June 1st and it burns down on June 15th, the former owner cannot recover because they suffered zero financial loss.
A homeowner sells their residential property to a buyer on June 1st and closes escrow. On June 15th, before the previous owner cancels their property policy, a catastrophic fire destroys the residence. Why is the previous homeowner legally barred from recovering insurance proceeds under the policy?