The basics of insurable interest
To have an insurable interest means you have some sort of financial stake in the subject matter of a policy (i.e., person or thing being insured). For example, you have an insurable interest in your home because you would experience a financial loss if the house or belongings were destroyed or damaged.
Another way to think about it is whether or not the person looking to buy a policy would have to pay for a loss if they didn’t get insurance. The need to come up with cash demonstrates that person’s insurable interest in the property. If someone doesn’t have a financial interest in the house, there is no insurable interest.
You have to have an insurable interest in the thing to insure it. In other words, you can’t buy a home insurance policy on your neighbor’s house. Even if you did, the policy would be unenforceable.
Insurable interest examples
Insurable interest must exist for a policy to be underwritten. This is true for any insurance policy, including homeowners, business, and life insurance. A person can have an insurable interest in the life of a spouse who earns the family’s income. If the spouse were to die, that person would be without the spouse’s income to support – that’s an insurable interest.
When it comes to homeowners insurance, the question is “Who stands to lose financially if the home is lost or destroyed?” You, the homeowner, clearly stands to lose money. But in some cases, another party may be affected, such as a mortgage company.
This is why mortgage companies almost always require borrowers to buy homeowners insurance. Your mortgage company could be on the hook for hundreds of thousands of dollars or more if your house suffers a total loss without insurance. It’s also why you may receive a claim payment check made payable to both you and your mortgage company. That way, your mortgage lender knows its interest in your home is maintained.
But your mortgage company doesn’t have an insurable interest in everything that’s covered in your homeowners policy, only the physical structure. Your personal belongings, such as clothes and electronics, yours alone so a claim payment for those items come solely to you.
You should note that your insurance company will notify your mortgage lender if you cancel your homeowners policy and don’t obtain new insurance while the lender still has an insurable interest in your home. Your lender also has the authority to purchase home insurance for your property and add the cost of the coverage to mortgage payments..
How an insurable interest appears on homeowners policy
Parties with an insurable interest in your home are listed on the insurance policy in most cases, and you can usually find them on your declarations pages. As the homeowner and policyholder, you're listed as a named insured. Family members who live in the house are also covered, although they may not be individually named. Some insurers only include a spouse if the spouse’s name is on the deed.
Your lender, or anyone else with an insurable interest, also appears on your declarations page, often as an additional insured or a loss payee. This allows them to protect their interest in the property but does not make them liable for premiums or allow them to control coverages or make changes to the policy.
When a party has an insurable interest in a property, they often request proof of insurance that shows that they are protected against losses. This is usually accomplished by sending them a certificate of insurance to demonstrate that you’ve named them as either a loss payee or an additional insured.