INSURABLE INTEREST

Insurable interest is one of the basic requirements for all types of insurance coverage. According to the Malaysia law, this principle is defined in the insurance act(Act 553) part 7, section 152. Since the basic principle of insurance is to compensate the insured from any loss, insurable interest is used to nullify claims by people are not affected by certain losses. trying to make a claim in something that does not affect you can lead to moral hazard. a very popular case in relation to this is the blue eyed six case

In the late 1800's, in Lebanon County, Pennsylvania, there was an old man who looked like he was going to die very soon. So 6 men, who were unrelated to the old man and had no financial stake in his death, decided to make money by taking out life insurance on him, which they could do at that time. But the old man lived a lot longer that they expected—and the premiums were expensive. So they decided to murder him to collect the life insurance sooner

the case above is a clear indication of why we need insurable interest, it is clear that these men wanted to profit from the insurance coverage. They did not in any way have insurable interest but rather were motivated by their selfishness and greediness. The men were arrested and all of them sentenced to death for this barbaric act. As hence it is for scenarios like these that we need to have insurable interest.

A person has an "insurable interest" in something when loss or damage to it would cause that person to suffer a financial loss or certain other kinds of losses.

For example, if the ploughing land you own is damaged by storm, the value of your land has been reduced, and whether you re-plough it, its value have been lowered because the crops in it have been destroyed, if the crops grew with no damage you would have reaped the benefits sooner rather than later as hence you have suffered loss from the storm. By contrast, if the same happen to your neighbor's land, which you do not own you may feel sympathy for them and you may be emotionally upset, but you have not suffered any loss due to the storm, therefore you have an insurable interest in your own land, but not in you neighbors'.

For purposes of life insurance, everyone is considered to have an insurable interest in their own lives as well as the lives of their spouses and dependents and the insurable interest only needs to exist at the time the policy is purchased.. For property and casualty insurance, the insurable interest must exist both at the time the insurance is purchased and at the time a loss occurs.