What is meant by "insurable interest" in insurance?

Insurable interest refers to a fundamental principle in insurance confirming that the policyholder must have a legitimate financial interest in the item or person being insured. This requirement ensures that the insured party benefits from the policy only if a loss occurs, thus discouraging fraudulent claims and promoting responsible insurance practices.

For instance, if an individual insures a car, they must either own it, have a financial stake in it, or have some personal interest in its preservation. Without insurable interest, the very basis of the insurance contract could be undermined, leading to situations where individuals might benefit from the loss of items they do not own or care about.

This principle is vital as it helps align the interests of the insurer and the insured, ensuring that the insurance contract serves its purpose of providing protection against genuine financial risks. Other options presented in the question address different aspects of insurance but do not capture the essence of insurable interest as accurately as the correct option does.