What happens if a person does not have an insurable interest in a policy?

When a person does not have an insurable interest in a policy, the policy is considered void. Insurable interest is a fundamental requirement in insurance contracts that ensures the policyholder stands to suffer a financial loss or hardship if the insured event occurs. This principle protects the insurance company's financial integrity and prevents moral hazard, where someone might take out a policy on a person or entity they do not have a legitimate interest in, leading to potential fraud or abuse.

If insurable interest is lacking at the time the policy is issued, the contract cannot be upheld as it violates the basic tenets of insurance law. Therefore, the policy becomes void, and no valid insurance coverage exists. This concept is crucial in understanding how insurance operates and highlights the necessity of a tangible benefit for the policyholder related to the insured party or asset.