The principle of insurable interest acts as a safeguard against moral hazard by ensuring that a person can only insure something in which they have a legitimate financial interest. This means the insured will suffer a real financial loss if the insured event occurs. Because of this, people cannot take out insurance on property or lives in which they have no interest, such as a stranger’s house or life, to profit from a loss or death. This discourages dishonest or careless behavior, such as intentionally causing damage or making false claims, since the insured’s goal is to protect themselves from genuine loss, not to gain from it.

This principle is essential for maintaining the integrity of the insurance industry because it promotes fairness, prevents insurance from becoming a tool for gambling, and protects insurers from fraudulent claims. By requiring insurable interest, insurance companies can ensure that contracts are based on genuine protection rather than profit-seeking motives, which helps build public trust and keeps the system stable and ethical.