What occurs to an insurance contract when there is no insurable interest?

An insurance contract relies heavily on the principle of insurable interest, which is essential to its validity. When a party lacks insurable interest, the contract is rendered void. This means that the insurance policy has no legal effect, and both parties cannot enforce the terms as valid agreements.

In this scenario, any premiums that were paid must be refunded to the policyholder, as their expectation of coverage is based on a legally enforceable agreement that cannot stand without insurable interest. Thus, the relationship that justifies the provision of insurance—where the policyholder stands to lose if the insured event happens—is absent. As a result, the correct outcome is that the contract is void, and the premiums are returned.

The other options suggest scenarios where the contract could remain valid or where rights and obligations under the policy still exist, which contradicts the foundational legal principle that a lack of insurable interest nullifies the agreement.