Tennessee Insurance Practice Exam

Which of the following is a true statement related to the concept of insurable interest?

1. It can exist after the policy is issued

2. It is not required for property insurance

3. It must exist at the inception of the contract

4. It is invalid in life insurance

The correct answer is: It must exist at the inception of the contract

The statement that insurable interest must exist at the inception of the contract is accurate. Insurable interest is a fundamental principle in insurance that protects the integrity of contracts. It means that the policyholder must have a legitimate interest in the subject of the insurance to ensure that their financial well-being could be affected by any loss or damage that occurs. This principle serves to prevent moral hazard, where individuals might engage in reckless behavior since they do not bear the financial consequences of their actions. In property insurance, for instance, the policyholder must have a vested interest in the property being insured at the time the insurance contract is created. If the policyholder does not have this interest when the policy is initiated, the contract would be void and unenforceable, as it would not meet the legal requirements for an insurance agreement. While insurable interest may still exist or develop after the policy is issued, it is crucial that it is present at the contract's inception to validate the insurance coverage. The other options imply scenarios that either misrepresent the necessity and application of insurable interest in insurance contracts or incorrectly limit its relevance in specific types of insurance.