What does the principle of insurable interest require from the insured?

The principle of insurable interest stipulates that the insured must have a financial stake in the subject of the insurance at the time of taking out the policy. This means that the insured should stand to suffer a financial loss if the insured event occurs, which establishes a legitimate interest in the protection of that asset.

Having a financial stake ensures that the insured has a genuine concern for the well-being of the subject matter of insurance, thereby reducing the potential for moral hazard, where someone might take undue risks because they do not face the financial consequences of their actions.

In contrast, the requirement to fully own the insured asset does not capture the essence of insurable interest entirely, as one can have an insurable interest without owning the asset outright (for example, a lessee may have an interest in a rental property). Additionally, having a legal contract with the insurer is a fundamental part of any insurance agreement but does not address the necessity of having a financial interest. Lastly, being related to the insured subject does not inherently create a financial interest; a relationship alone does not justify insuring someone or something.

Thus, the essence of insurable interest is rooted in the financial stake linked to the subject of the insurance.