Legal Definitions - wager policy

A wager policy refers to an insurance contract where the person purchasing the policy lacks an insurable interest in the subject of the insurance. This means the policyholder would not suffer a genuine financial loss if the insured event occurs. Because there is no legitimate risk to protect against, such a policy is considered a mere bet or gamble rather than a true transfer of risk, and it is generally unenforceable in law.

An insurable interest is a fundamental requirement for a valid insurance contract. It means that the policyholder must have a legitimate financial stake or a recognized relationship with the person or property being insured, such that they would genuinely benefit from the continued existence of the insured item or person, or suffer a financial detriment from its loss or damage.

• Example 1: Insuring a Stranger's Property

  Imagine a person, Sarah, decides to purchase a fire insurance policy on a large commercial building located in a different city, which she neither owns, leases, nor has any business dealings with. Her sole motivation is the hope of collecting an insurance payout if the building were to catch fire. Because Sarah has no financial stake in the building's existence or destruction, her policy lacks insurable interest. This policy would be classified as a wager policy, making it legally invalid, as it's essentially a bet on the building's misfortune rather than protection against a personal loss.

• Example 2: Life Insurance on a Public Figure

  Consider a fan, David, who takes out a life insurance policy on a famous athlete they admire, naming themselves as the beneficiary. David has no financial relationship with the athlete, is not dependent on them, and would not suffer a financial loss upon the athlete's death beyond emotional distress. Since there's no legitimate financial interest in the athlete's continued life (e.g., the athlete doesn't owe David money, nor is David financially reliant on the athlete), this policy would be deemed a wager policy. It's a gamble on the athlete's lifespan, not a genuine protection against financial hardship for David.

• Example 3: Car Insurance Without Ownership

  Suppose a neighbor, Mark, secretly takes out an auto insurance policy on his neighbor's car without the neighbor's knowledge or permission. Mark does not own the car, is not a registered driver, and has no financial responsibility for it (e.g., he's not a lienholder or co-owner). If the car were to be damaged or stolen, Mark would not suffer any direct financial loss. Because Mark lacks an insurable interest in the vehicle, this insurance policy would be considered a wager policy, as it's a speculative bet on an event rather than a legitimate risk transfer.