Why is insurable interest necessary for a valid insurance contract?

Insurable interest is necessary for a valid insurance contract primarily because it confirms the policyholder's financial stake in the life or well-being of the insured. This principle ensures that the person purchasing the insurance gains a legitimate interest in the insured's life, meaning they would suffer financially or emotionally from the person's loss. It is a foundational element in insurance, preventing moral hazard, where someone might take out insurance on individuals they have no real connection to or concern for, thereby allowing for fraudulent activities or encouraging harm.

When there is a legitimate insurable interest, it aligns the interests of both the insurer and the insured, creating a fair system where the insurer compensates the policyholder for losses incurred. This principle not only protects the insurer from fraudulent claims but also emphasizes the seriousness and purpose of insurance – to provide security for individuals and families against unforeseen events.