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What is insurable interest?
When you have an insurable interest in something, it means you own it (or at least part of it). It means you would suffer a monetary loss if that something were damaged, lost or destroyed. It means you’re somehow benefiting from that something’s existence or you’d be harmed by its loss.
When it comes to home insurance, the main objects of insurable interest are the building and the contents. Put another way: the house and the stuff inside it. The person or people who own the home have an insurable interest in those objects.
Insurable interest is vital in the world of insurance. By law, you can’t take out an insurance policy on property if you don’t have an insurable interest in it. You can’t buy a home insurance policy for your neighbour’s house, for example.
Such an arrangement would create what’s known as a moral hazard. If you were allowed to insure your neighbour’s house, you’d have a strong incentive to destroy your neighbour’s house. Your illegal insurance policy would pay you to rebuild the house even though you didn’t own it or have any financial stake in it. That’s why insurable interest is a fundamental part of insurance.
Who has an insurable interest?
The simplest way to think of it is that the owner of property has insurable interest in it.
But what about property with multiple owners?
They share insurable interest in the property in proportion to their ownership. If two people each own 50% of a house, they each have an insurable interest in 50% of that house.
Insurable interest is slightly more complicated than just ownership, however. If you are a homeowner with a mortgage, you’re sharing insurable interest with your mortgage lender:
Mortgage lenders don’t literally own a share of the home, but they do have a financial interest in it. If the homeowner can’t make their mortgage payments, only then can the mortgage lender take ownership and sell the home to get their money back.
Thus, they’d be in a pickle if the house were to burn down: they’d have no way of collecting if the homeowner stopped paying and there was no house to sell.
For that reason, homeowners always have to list their mortgage lender on their home insurance policy. That way, the lender has some protection for their investment.
It works the same way for condo owners, except a condo owner has an insurable interest only in their share of the condo building: their unit. If they have a mortgage, their lender shares in that interest.
The condo corporation has insurable interest in the common parts of the building, and other owners have insurable interest in their own units.
Insurable interest doesn’t just exist for homeowners, though; renters have insurable interest in their property too.
The difference is that renters don’t have an insurable interest in their home itself. The building they live in belongs to their landlord, so they don’t suffer any financial loss if it gets damaged. There’s one exception though: if a renter’s apartment were destroyed, they’d have some extra costs for temporary accommodation while their apartment got repaired (or while they searched for a new home). These extra living costs can be covered by a renters insurance policy. But, that doesn’t represent an insurable interest in the apartment.
Instead, renters only have an insurable interest in the contents of their rented home: their furniture and clothes and electronics, and so on. Accordingly, renters insurance policies don’t include coverage for the building; the landlord needs their own home insurance policy for that.
What are some examples of insurable interest?
- As in our example from earlier with Stacey, a homeowner with a mortgage has an insurable interest in the home. Their insurable interest is equal to their equity in the home: the amount they’ve paid between their down payment and their mortgage payments to date. Their mortgage lender holds the rest of the equity in the home, and therefore also has an insurable interest.
- A condo owner has paid off their mortgage and rents out their condo. They are the only person with an insurable interest in the condo. Their tenants’ insurable interest only extends to their own possessions.
- Two brothers inherit the family home. There is no mortgage on the home, so they own it outright. Each brother owns 50%; thus, they each have an insurable interest in 50% of the home’s value. Instead of separate policies, they will be able to purchase a joint home insurance policy.
- A resident of a housing co-operative does not own their unit; they own a share in the co-op corporation that owns the building. A co-op resident isn’t financially responsible for the structure of their unit, so they don’t have an insurable interest in it. Their situation is closer to that of a tenant: they’re responsible only for their contents. If they spend money to upgrade their unit, they have an insurable interest in the upgrades (like a condo owner).
The important points
- Homeowners have an insurable interest in their homes, as do their mortgage lenders.
- You can’t take out an insurance policy on something you don’t have an insurable interest in.
- Renters don’t have an insurable interest in the building they live in, only their possessions.
- To have an insurable interest in something means you own it, or would suffer financially if it were damaged or destroyed.
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