Verified.

Tested on: Satellite 6.16 snap 2.0 (RHEL8 & RHEL9)

Steps followed:

1. Navigate to Infrastructure -> Compute Resources -> Create CR with Libvirt
2. Select Libvirt CR -> Images -> Create image name which doesn't exist
3. Hosts -> Create Host -> 'Host' tab -> Deploy On -> select Libvirt Cr
4. Select Architecture, Operating system -> in 'Provisioning Method' select 'Image Based' -> select Image 

Additional info:
After selecting an invalid image, it displays 'Image not found'.