Illinois Casualty Insurance State Practice Exam

What is the concept of insurable interest?

1. A policyholder’s financial interest in insurance against unforeseen events

2. A type of risk coverage unavailable in certain industries

3. The chance of an accident occurring

4. The amount of coverage paid at the time of loss

The correct answer is: A policyholder’s financial interest in insurance against unforeseen events

The concept of insurable interest refers to the requirement that a policyholder must have a legitimate financial stake in the insured item or person at the time the insurance policy is purchased. This means that the policyholder would suffer a financial loss or hardship if the insured event were to occur. In insurance, this principle is essential because it helps to prevent moral hazards, where an individual might engage in risky behavior knowing they would benefit from a payout. Having insurable interest ensures that the insurance contract is based on a real economic need rather than a speculative interest. For instance, a person who owns a car has an insurable interest in that vehicle, as they would incur a financial loss if it were damaged or destroyed. Similarly, a business has an insurable interest in its property and potential liabilities. The other options do not accurately capture the essence of insurable interest, as they focus on different aspects of insurance, such as types of coverage or general risk concepts, rather than the specific requirement that the insured must have a direct connection to the item or individual being insured.