What can happen if a policyholder does not hold a valid 'insurable interest'?

When a policyholder does not hold a valid 'insurable interest', the implications directly impact the validity of the insurance policy. Insurable interest is a fundamental principle that ensures a policyholder has a legitimate interest in the preservation of the insured item or person. If this interest is absent, the insurance policy may be deemed a wagering contract, which is not enforceable under insurance law.

In such cases, the insurer has the right to declare the policy void or invalid. This means that the policyholder would not be able to claim compensation for any losses, as they have no stake in the insured risk. Insurers require insurable interest to ensure that the policyholder is genuinely concerned about the preservation of the asset, which deters moral hazard—where individuals may exploit insurance for personal gain.

The options presented illustrate situations that would not occur when insurable interest is lacking. For example, a policy being valid regardless of ownership or continued coverage without issues undermines the principle of insurable interest. Similarly, the automatic refund of the premium would not occur as the policy is simply rendered null and void, rather than terminated under normal circumstances.