Insurance Law's Hapless Busybody: A Case against the Insurable Interest Requirement

Abstract

A B ST R ACT. For centuries, the law has prevented people from purchasing insurance on the life or property of strangers because such insurance contracts would give policyholders incentives to end the life or destroy the property in order to collect the insurance payout. The law thus requires that policyholders have an "insurable interest" in the person or property they insure, and contracts lacking such an "insurable interest" are invalidated by courts as against public policy. This Note presents an economic analysis of the insurable interest requirement, and argues that the doctrine creates perverse incentives that encourage the very practices the doctrine seeks to deter. In addition to failing on its own terms, the doctrine also invites unfairness and inefficiency in the insurance market. This Note concludes that the best way for courts to prevent insurance contracts on the life or property of strangers may be to refrain from invalidating such contracts in the first place.