If they let me insure my stuff for 100x of what it's worth, I lose all the incentive to prevent damage.
Even in the legit cases the insurance companies have to account for the "don't worry, it's insured" mindset. Keeping the ceiling on the insurance value is intended to leave at least some of the incentive to prevent the damage with the owner.
The insurance companies cannot rely solely on the "don't be careless" contract clause.
> If they let me insure my stuff for 100x of what it's worth, I lose all the incentive to prevent damage.
So what, though? Can't they just adjust the premium to account for that? It's not like they can't do their own modeling of what the item is likely worth -- if they see it's 1% of what you stated, then they can just as well cite you a ridiculous premium so that you wouldn't feel it's worth it. What's wrong with that?
> For example, if I had a 15 year-old, unremarkable used car but insured it for $1m, then I'd have an incentive to leave it parked (but locked!) in sketchy areas of town in the hopes that it would be stolen.
No, you wouldn't if the premium is high enough (i.e. your net gain from doing so is small enough).
In theory nothing, in practice it's just not worth it. Mind that the bad effects would also spread broader than a voluntary contract between two parties.
We'd have to fund the courts to resolve the inevitable insurance fraud accusations, not to mention the additional firefighting crews to put out the additional fires that consume the $1 pillows.
Even in the legit cases the insurance companies have to account for the "don't worry, it's insured" mindset. Keeping the ceiling on the insurance value is intended to leave at least some of the incentive to prevent the damage with the owner.
The insurance companies cannot rely solely on the "don't be careless" contract clause.