Insurable interest means having a financial stake in a piece of property to the extent that if it was damaged or destroyed, you’d stand to lose… a lot.
What is insurable interest?
Think about your clothes. You bought them, you own them, and if something happened to them, you would probably face a financial loss. For this reason, you have an “insurable interest” in your clothes.
Now, let’s look at the bigger picture.
In general, you have insurable interest in something if you’d suffer an economic loss if it were damaged or destroyed.
Not only that, but you’d also receive some benefit from its continuous existence. And for this reason, you’d probably want to get it insured, as well as maintain some sort of proof you owned this item.
Insurable interest in renters insurance
If you have renters insurance, your policy covers the things you have an insurable interest in, aka your personal property (think: phone, laptop, TV, etc) and if your things were damaged or stolen, you’d suffer a financial loss (and you’d miss out on using them).
Pro tip: If they are expensive and have some kind of warranty on them, you’d probably want to keep a record of the purchase as well – since lack of proof of ownership can really slow down any claim you may have!
But the thing is, renters insurance doesn’t cover the structure of your apartment building. Why’s that? Because technically, you don’t have a financial stake in your building, just in your stuff.
Your landlord is the one with the insurable interest in this situation.
That’s why damage to your apartment walls and the structure of your building would be covered under your landlord’s insurance – if either of these things were somehow destroyed or damaged, it would cause your landlord a financial loss, not you.
Insurable interest in homeowners insurance
Quiz: What’s one of the main differences between renters and homeowners insurance?
Answer: Homeowners insurance covers your stuff and your home. So if a peril damages your home itself (aka “the structure”), it’d be covered under your homeowners insurance policy.
Why? Well, turns out your home is an insurable interest to you, because you’d suffer a financial loss if something happened to it (and you benefit from the fact that it still exists).
The law of insurable interest
In fact, when it comes to home insurance, there’s a “law of insurable interest.” That means you can only get paid by an insurance company for damage to a home that you have an insurable interest in. The point of this law is to protect against fraud and dishonesty.
For this reason, you’re not allowed to buy homeowners insurance for a random property, say your neighbor’s house. You have no insurable interest in it, because it’s owned by somebody else. This rule is put in place to avoid any situations where someone would have a reason to damage somebody else’s house so they can collect money from the insurance company.
That’s also why, when you decide to get homeowners insurance for your home, the insurance company will make sure you have an insurable interest in the property.