insurable interest

(insurance) The valid, determinable, and direct economic stake of an individual in the continued existence or safety of an insured person or property. A policy holder or beneficiary must stand to suffer a direct financial loss if the event against which insurance is purchased occurs.
An individual or business entity can have insurable interest in property even if it is not the owner.
A typical case of insurable interest is where title to goods has passed from the seller to the buyer, but where the seller has yet to receive payment, and still has exposure for loss.
Example 1: When a seller sells on FOB inland point terms, he transfers the title to the buyer before the commencement of the ocean voyage. In this case the obligation to place marine and war risk insurance rests, strictly speaking, with the buyer. However, it is customary in many trades for the seller on FOB terms (or similar terms), to obtain insurance, as well as ocean freight space, for account of the buyer.
This is, in effect, an agency relationship. It can be provided for by a policy clause reading: “to cover all shipments made by or to the assured for their own account as principals, or as agents for others and in which they have an insurable interest, or for the account of others from which written instructions to insure them have been received prior to any known or reported loss, damage or accident prior to sailing of vessel.”
Example 2: The seller on FOB or other terms, under which the title passes to the buyer at some inland point of departure, will have a financial interest in the goods until payment has been received. This situation arises when the terms of payment call for sight draft against documents, or for acceptance at 30-60-90 days sight, or for open account. Under such circumstances, the seller will be well advised to place his own insurance to protect himself in the event that the loss or damage to the shipment impairs the buyer’s desire to make payment as originally contemplated. For example, the buyer may be uninsured, or the buyer’s coverage may be inadequate because of under-insurance or restricted conditions. The buyer’s insurance company may be less liberal in loss adjustments than would the insurer of the seller or, because of currency restrictions, a foreign company may be hampered in its ability to transmit funds. See contingency insurance.

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