Washington State Insurance Practice Exam

What does the insurable interest requirement ensure?

1. The insured is liable for all damages

2. The insured must have a financial stake in the property or life insured

3. The insurer can cancel a policy at any time

4. All insurance policies are equally valuable

The correct answer is: The insured must have a financial stake in the property or life insured

The insurable interest requirement is a fundamental principle in insurance that ensures the insured has a legitimate financial stake in the property or life being insured. This means that the insured stands to suffer a direct financial loss if the insured item or individual is harmed or destroyed. This principle serves to prevent moral hazard, ensuring that the insured does not have an incentive to cause damage or loss to the insured item or person. By requiring insurable interest, the insurance industry helps to maintain the integrity of the contract and ensures that insurance is used as a means of risk management rather than as a speculative tool. Without this requirement, individuals could take out policies on properties or lives in which they have no genuine interest, potentially leading to fraud and increasing risk. In contrast, the other options do not accurately reflect the purpose of the insurable interest requirement. The concept of liability for damages relates more to the responsibilities of the insured rather than the necessity for having an insurable interest. The ability of an insurer to cancel a policy or the valuation of insurance policies are separate considerations that do not pertain directly to the central purpose of ensuring a financial stake.