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Insurable Interest

An interest in the subject of an insurance policy that is not unduly remote and that would cause the interested party to suffer financial loss if an insured event occurred

Insurable Interest Requirements

It supports the principle of indemnity
It prevents the use of insurance as a wagering mechanism
It reduces the moral hazard incentive that insurance may create for the insured

Principle of Indemnity

Ensures that only those parties who suffer financial loss are indemnified, and then only to the extent of their loss

Wagering Mechanism

Insuring an event from which they would not suffer a loss and then profiting when that event occurs

Moral Hazard Incentive

Because the insurable interest requirement limits insureds' ability to profit from insurance; the incentive to cause losses intentionally is reduced

Legal Bases for Insurable Interest

Ownership interest in property
Contractual Obligations
Exposure to Legal Liability
Factual Expectancy
Representation of another Party

Contractual Rights Regarding People

A contract may give one party the right to bring a claim against a second party without entitling the first party to any specific property that belongs to the second party

Unsecured Creditor

Do not have an insurable interest in debtors' property

Contractual Rights Regarding Property

Some contracts allow one party to bring a claim against specific property held by a second party

Factual Expectancy

A situation in which a party experiences an economic advantage if an insured event does not occur or, conversely, economic harm if the event does occur


In the agency relationship, the party that is authorized by the principal to act on the principal's behalf


Someone who has the legal title to a property but is responsible that it be used, handled, and transferred solely for the benefit of the beneficiary


The party temporarily possessing the personal property in a bailment


The owner of the personal property in a bailment

Joint Tenancy

Each owner owns the entire property and has right of survivorship

Tenancy by Entirety

Joint tenancy between a husband and wife

Tenancy in Common

Concurrent ownership of property, in equal or unequal shares, by two or more owners, no survivorship rights

Tenancy in Partnership

Concurrent ownership by a partnership and its individual partners of personal property used by the partnership

Insurance to Value

Insurance written for an amount approximating the full value of the asset(s) insured

Loss Frequency

The number of losses that occur within a specified period

Loss Severity

The amount of loss, typically measured in dollars, for a loss that has occurred

Insurance to Value Provision

A provision in property insurance policies that encourages insureds to purchase an amount of insurance that is equal to, or close to, the value of the property covered

Coinsurance Clause

A clause that requires the insured to carry insurance equal to at least a specified percentage of the insured property's value

Amount Payable

Limit of Insurance divided by (value of covered property at the time of loss times coinsurance percentage) times the total amount of covered loss

Agreed Value Optional Coverage

Optional coverage that suspends the Coinsurance condition if the insured carries the amount of insurance agreed to by the insurer or insured

Inflation Guard Protection

A method of protecting against inflation by increasing the applicable limit for covered property by a specified percentage over the policy period

Peak Season Endorsement

Endorsement that covers the fluctuating values of business personal property by providing differing amounts of insurance for certain time periods during the policy period

Actual Cash Value

Cost to replace property with new property of like kind and quality less depreciation

Replacement Cost

The cost to repair or replace property using new materials of like kind and quality with no deduction for depreciation


Reflects the value of the use that the insured has already received from the property

Market Value

The price at which a particular piece of property could be sold on the open market by an unrelated buyer and seller

Broad Evidence Rule

A method for determining actual cash value based on court decisions that require all relevant factors to be considered

Agreed Value Method

A method of valuing property in which the insurer and the insured agree, at the time the policy is written, on the maximum amount that will be paid in the event of a total loss

Functional Valuation Method

A valuation method in which the insurer is required to pay no more than the cost to repair or replace the damaged or destroyed property with property that is its functional equivalent

Agreed Value Option Coverage

An arrangement for suspending the coinsurance clause in commercial property insurance coverages such as the building and personal property coverage form or the business income coverage form


Money claimed by, or a monetary award to, a party who has suffered bodily injury or property damage for which another party is legally responsible


Risk financing technique that requires the insured to retain a portion of the loss that is being transferred to an insurer

Dollar Trading

An insurance premium and loss exchange in which the insured pays the insurer premiums for low value losses, and the insurer pays the same dollars back to the insured, after subtracting expenses

Self Insured Retention

A dollar amount specified in an insurance policy that the insured must pay before the insurer will make any payment for a claim

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