Examkin

Question

Difficulty: EasyBasic Principles of Insurance

Chief Emeka attempts to take out a fire insurance policy on his neighbor's commercial warehouse, despite having no financial stake or legal connection to the property. The insurance company refuses to issue the policy on the grounds that he does not stand to suffer any direct financial loss if the building is destroyed. Which basic principle of insurance is Chief Emeka failing to satisfy?

  1. Insurable interestAnswer
  2. B
    Utmost good faith
  3. C
    Indemnity
  4. D
    Subrogation

Answer

Insurable interest is the correct principle because a person must have a financial or legal stake in the insured item to take out a valid insurance contract.
Insurable interest is the foundational requirement stating that a policyholder must possess a recognized financial or legal relationship with the item being insured, such that its loss would cause them direct financial hardship.

Step-by-Step Solution

1
Analyze the relationship between Chief Emeka and his neighbor's property
Chief Emeka has no financial or legal ownership stake in the neighbor's warehouse.
To insure any property, the law requires that the proposer will suffer direct financial harm if the subject matter is damaged or destroyed.
2
Identify the insurance principle governing legal financial interest in property
The requirement of having a legal financial stake is known as insurable interest.
Without insurable interest, an insurance contract becomes a mere gambling contract, which is legally void.

Key Concept

Principle of Insurable Interest
Estimated Time:45s
Rate this question

Topics

Basic Principles of Insurance

More questions from this topic