Two foundational principles distinguish insurance from a wager.
- Insurable interest: the insured must stand to suffer a real financial loss from the destruction or damage of the subject matter, or from the legal liability insured against. Without an insurable interest the contract is unenforceable as a wager. In property insurance, the interest must exist both at the inception of the policy and at the time of loss.
- Indemnity: the insurance contract is intended to restore the
insured to the financial position they occupied immediately before the
loss, no better and no worse. The insured should not profit from a
loss. Indemnity is enforced through:
- The measure of loss (e.g., actual cash value vs. replacement cost on property, agreed value on inland marine items);
- The principle of subrogation (the insurer succeeds to the insured's recovery rights against any third party who caused the loss);
- The principle of contribution (where two or more policies cover the same loss, each contributes rateably).
Some contracts are valued or "non-indemnity" by nature. Life insurance and most accident-and-sickness benefits pay a stated sum because human life is not measurable in dollars. RIBO brokers generally do not write those, but the distinction is testable.
Common mistake: confusing insurable interest with ownership. A tenant has an insurable interest in improvements they paid for; a mortgagee has an insurable interest in the mortgaged property; a parent may have an insurable interest in property used by a dependent. Legal title is not the only path.
🧠 Memory hook, "Property: in at inception AND at loss": insurable interest must exist at both moments, not just one.
Recall: When must insurable interest exist for a property policy to respond? Name two mechanisms by which the principle of indemnity is enforced.