Future Business Leaders of America (FBLA) Business Law Practice Exam

What is the concept of insurable interest?

1. A financial stake in a property or business

2. A requirement for all contracts

3. A legal obligation to insure property

4. A risk assessment in insurance

The correct answer is: A financial stake in a property or business

Insurable interest is best defined as having a financial stake in a property or business. This concept is fundamental in insurance law because it establishes that the insured party must benefit from the preservation of the insured item and would suffer a financial loss if the item were damaged or lost. This requirement helps to prevent moral hazard, which occurs when a person may be more likely to take risks with property if they do not have a financial stake in it. Insurable interest must exist at the time the insurance policy is purchased and, in certain types of insurance, at the time of the loss. For example, a homeowner has an insurable interest in their house because they would suffer financially if it were to be destroyed. While other options touch on relevant aspects of insurance, they do not capture the essence of insurable interest as accurately. A requirement for all contracts is too broad, as not all contracts need to demonstrate insurable interest. Similarly, a legal obligation to insure property is misleading, as insurable interest is about having a stake rather than a mandatory requirement to insure. Lastly, risk assessment in insurance refers to evaluating the risk of loss, but it is not the same as establishing a financial interest in the subject matter of the insurance policy.