What does the term "insurable interest" refer to?

The term "insurable interest" is defined as the financial stake or relationship that an individual or entity has in the insured item. It is a fundamental principle in insurance that ensures that the policyholder stands to suffer a financial loss if the insured event occurs, thereby reducing the risk of moral hazard and fraudulent claims. Insurable interest must exist at the time of insurance application and, in most cases, at the time of loss; if it does not, the insurance contract could be rendered void.

For instance, a homeowner has an insurable interest in their property because they would suffer financially if the house were damaged or destroyed. Similarly, a business has an insurable interest in its equipment or inventory as its operations and profits depend on these assets. This principle protects both the insurer and the insured, as it requires that only those with a legitimate interest in the property or life can take out an insurance policy on it.