South Dakota Crop Insurance Practice Exam

Which of the following best describes an insurance policy's insurable interest?

1. A financial incentive for the insurer

2. An obligation to ensure profitability

3. A legitimate interest of the insured in the property or person insured

4. A guarantee of continued coverage

The correct answer is: A legitimate interest of the insured in the property or person insured

An insurance policy's insurable interest is best described as a legitimate interest of the insured in the property or person insured. This concept is fundamental in insurance because it ensures that the insured has a valid stake in the insured item or person, which helps prevent moral hazard and fraud. Essentially, insurable interest means that the insured would suffer a financial loss if the property were damaged, lost, or the person were harmed, thereby justifying the insurance coverage. In practical terms, an insured party must demonstrate a connection to the property or person they seek to insure, whether through ownership, a lease agreement, or certain types of legal relationships. This requirement helps to uphold the integrity of the insurance system, as it closely links the insured's financial stake to the risk being underwritten by the insurer. Other descriptions, such as a financial incentive for the insurer, do not accurately capture the relationship that defines insurable interest. It is also not merely an obligation to ensure profitability or a guarantee of continued coverage, as these concepts pertain to the insurer's operations rather than the foundational principle of insurable interest itself.