What is meant by insurable interest in insurance?

Insurable interest is a fundamental concept in insurance that means a policyholder must have a legitimate interest in the subject matter of the insurance policy, such as property, life, or health. The principle ensures that insurance contracts are not merely gambling arrangements and that the insured stands to suffer a financial loss if the insured event occurs.

In the context of the correct choice, financial risk of loss must exist at the time of loss, highlighting that the insured must have a financial stake in the asset being insured. This requirement protects both the insurer and the integrity of the insurance system by ensuring that the insured is genuinely at risk of suffering a financial setback due to a covered loss.

This concept does not pertain to emotional attachment to the property, although that may exist; rather, it focuses on a financial obligation or interest that creates a valid reason for purchasing the insurance. Moreover, the insured's happiness with the coverage does not affect the definition of insurable interest, as it's more about the financial implications than personal sentiments. Lastly, insurable interest is a requirement for both the insured and sometimes the insurer in certain contexts; the insurer must have an interest to underwrite the policy, but this does not negate the necessity for the insured party to have an insurable interest