Which term best supports the concept of insurable interest?

The concept of insurable interest is fundamentally tied to the principle of indemnity, which holds that an insured party should not profit from a loss but should be restored to the financial position they were in prior to the loss. Indemnity ensures that an insured person cannot claim more than the actual loss they suffered, as they have a legitimate stake in the property. This principle reinforces the necessity of having an insurable interest; an individual can only insure items in which they have a financial concern or risk of loss.

For example, if a person holds a policy on a vehicle they own and it is damaged, they are eligible to recover costs associated with that damage because they have an insurable interest in the vehicle. By limiting claims to the actual loss, indemnity prevents potential for moral hazard where individuals might deliberately cause harm or loss to benefit financially from an insurance payout.

The other options—actual cash value, replacement cost, and fair market value—while relevant to insurance and assessing damages, do not directly encapsulate the principle of having an insurable interest in the same way that indemnity does. Actual cash value accounts for depreciation, replacement cost focuses on the cost to replace without deduction for depreciation, and fair market value pertains to the price a willing