Explain options for contract to purchase an office building

Question

On February 1, Papco Corp. entered into a contract to purchase an office building from Merit Company for $500,000 with closing scheduled for March 20. On February 2, Papco obtained a $400,000 standard fire insurance policy from Abex Insurance Company. On March 15, the office building sustained a $90,000 fire loss. On March 15, which of the following is correct?

1. I. Papco has an insurable interest in the building.
2. II. Merit has an insurable interest in the building.
   1. a. I only.
   2. b. II only.
   3. c. Both I and II.
   4. d. Neither I nor II.