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“Insurable interest” is the underpinning principle of insurance, establishing who is eligible to purchase coverage for a particular asset. It also provides a clear guide as to who is responsible for organising and managing coverage should the asset relate to multiple interested parties.
Although it sounds complicated, it’s actually very simple – but with big implications!
In this guide, we explain insurable interest simply and in full, covering its meaning, how it applies to certain building insurance scenarios, and what you need to do if the burden of insurable interest falls on you.
What is insurable interest?
In very simple terms, insurable interest just means that you own something, and therefore would be impacted by that something becoming damaged.
See, “insurable interest” is always used in relation to an asset; let’s say a house. If you have insurable interest in a house, it means you have a financial stake to lose if it were to be damaged or destroyed.
Essentially, you own the house therefore if the house, for example, burns down, you would suffer the financial loss – no one else.
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In insurance, this means you are the one that needs protection, so you can and are responsible for seeking out and managing the insurance coverage that gives you that protection.
If you go to an insurer to take out a policy on something for which you do not have an insurable interest, there’s no stake to protect, making it impossible insure.
Who can have insurable interest in a building?
Insurable interest doesn’t always sit with a single person.
In many real-world scenarios, more than one party may have a financial stake in a building. For example:
- Freeholders and leaseholders
- Landlords
- Property management companies
- Mortgage lenders
While multiple parties may have an interest in the same asset, only one policy is usually arranged. This is where insurable interest expands beyond a legal concept and becomes a practical responsibility.
Whoever is responsible for arranging the buildings insurance must ensure that the policy adequately protects all interested parties.
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What does insurable interest mean in practice?
Having insurable interest means you have the right to acquire a building insurance policy, but it also means the burden of responsibility to ensure the building is insured for the correct amount falls on your shoulders… the old “great power / great responsibility” bit.
Buildings insurance is designed to cover the cost of reinstating the property following a total loss. That includes but is not limited to:
- Demolition and site clearance
- Professional fees (architects, engineers, surveyors)
- Compliance with current building regulations
- Materials and labour at today’s prices
If the sum insured doesn’t reflect the true reinstatement cost, the policyholder (and anyone else with an insurable interest) may be exposed to significant financial risk.
The consequences of underinsurance
Underinsurance is one of the most common issues in buildings insurance; over 80% of the properties we assess are underinsured! And it often arises unintentionally.
If a building is insured for less than its true reinstatement cost, insurers may apply an average clause. This can reduce the value of any claim, even if the loss is only partial.
For those with insurable interest, this can lead to:
- Unexpected repair costs
- Disputes between stakeholders
- Breaches of lease or lending agreements
How reinstatement cost assessments support insurable interest
A professional reinstatement cost assessment provides an independent, evidence-based calculation of the true cost to rebuild a property.
By commissioning an assessment, those responsible for buildings insurance can:
- Demonstrate they have met their duty of care
- Reduce the risk of underinsurance
- Ensure all parties with insurable interest are properly protected
- Review sums insured with confidence at renewal
In short, a reinstatement cost assessment helps turn insurable interest from a legal obligation into a well-managed insurance position, and, in turn, a well-managed property portfolio.
Book your Building Reinstatement Cost Assessment with Cardinus
If you are responsible for arranging buildings insurance, whether as a freeholder, managing agent or landlord, a reinstatement cost assessment is one of the most effective ways to ensure your insurable interest obligations are fully met.
Cardinus is a RICS-regulated organisation with a UK-wide network of highly qualified assessors. Whether you have a simple, single property or a dense and complex portfolio, our assessments provide a true account of rebuild costs that you can use to adjust your coverage with confidence.
