One of the most important and fundamental principles of short-term insurance is that one can only insure something if you have an insurable interest in the subject of insurance. The relationship between you and the subject must be legally recognizable. The simplest way to look at it is from the point of view of ownership. If you are the owner of a car you stand to suffer a financial loss should anything happen to your car. You therefore have an insurable interest in your car.

You cannot take out insurance on your neighbour’s car – think of the consequences. If both you and your neighbour take out insurance on the same car and the car is stolen you would both claim from insurance. You, not being the owner, would be enriched by receiving compensation for something that was not legally yours. The rule of insurable interest prevents insurance from becoming a form of gambling.

But ownership is not the only rule: potential liability can also be covered by insurance, such as third party insurance. Your interest in the item or peril that you want to insure must always be to the extent that loss or damage will result in a financial loss to you. So when we take out insurance we can actually say that it is our interest in the insured object that we are insuring.