Other Than Life (OTL) Practice Exam

What is required to establish a valid insurance contract?

1. Insurable interest

2. Indemnification clause

3. Premium payment evidence

4. Legal license

The correct answer is: Insurable interest

To establish a valid insurance contract, insurable interest is a fundamental requirement. Insurable interest refers to the necessity that the policyholder must have a vested interest in the subject being insured. This means that the policyholder would suffer a financial loss or hardship if the insured event occurred. Having insurable interest protects against moral hazards, where a person might deliberately cause damage to benefit from an insurance payout. It also establishes the legitimacy of the contract, ensuring that the purpose of the insurance is to protect the policyholder’s financial interests rather than to serve as a speculative investment. In contrast, while an indemnification clause helps define the compensation terms when a loss occurs, it is not a requirement to establish the contract itself. Similarly, evidence of premium payment and a legal license are important components of the contractual process but do not fulfill the foundational need for insurable interest that validates the contract. Without insurable interest, the insurance contract could not be recognized as legitimate.