Insurable interest, indemnity, and utmost good faith

Three principles of insurance

Insurable interest asks what the insured could lose. Indemnity asks what compensation is promised. Utmost good faith asks what material facts the parties must communicate.

Insurable interest

A legally recognized stake distinguishes protection from wagering. Property ownership, a lender's interest, or liability for another's property can expose someone to direct harm. California Insurance Code § 281 recognizes property interests, relationships, and liabilities through which a contemplated peril could directly harm the insured. A mere expectation unsupported by an actual right or valid contract is not insurable under § 283.

California's timing rule in § 286 requires property interest when insurance takes effect and when loss occurs, but not continuously between those moments. For life or health insurance, interest must exist when insurance takes effect, but need not continue thereafter or at loss. A person has an interest in their own life; close family and legitimate economic relationships can also support life insurance interests, subject to applicable law.

Indemnity

Indemnity compensates for covered loss rather than creating profit. California § 284 generally measures a property interest by the harm the insured could suffer. Coverage, valuation terms, deductibles, and limits determine the actual payment. A covered $4,000 property loss with a $500 deductible produces a $3,500 payment when no other reduction or limit applies. A policy limit is a ceiling, not an automatic payment.

Life insurance ordinarily pays a stated death benefit rather than reimbursing the survivor's proven financial loss. Some health policies also pay stated benefits instead of reimbursing expenses.

Utmost good faith

California § 332 requires both parties to communicate known material facts within the statute's conditions. Concealment is failing to communicate what a party knows and ought to communicate (§ 330); misrepresentation involves a false assertion. Materiality turns on probable, reasonable influence on evaluation or inquiries, not on whether the fact caused the eventual loss (§ 334). The duty has exceptions: for example, information the other party already knows generally need not be volunteered, though questions must be answered (§ 333).

Keep these concepts distinct: a stake supports insurance, contract terms govern payment, and good faith supports informed agreement.