What Does Material Fact Mean?
A material fact is a piece of information that is vital to evaluating and interpreting a subject matter in legal documents. This means that it is necessary, significant or essential to a reasonable person when deciding whether or not to engage in a particular transaction.
In insurance, material facts are used to determine the amount of coverage and the cost of the premium that will be charged. The information is used to determine the level of risk or class of insurance that the insurance company may be willing to offer. If it is deemed that a material fact was withheld, it may be grounds to terminate the policy or nullify the contract.
A simple example of a material fact for insurance is the insured person's age. It is presumed that an insurance transaction is being engaged in under the principle of utmost good faith
. This means that all parties are acting in an honest and ethical manner and not being willfully deceitful. When someone wants to get a health insurance policy, for instance, they must reveal their health history so that the insurer can adequately determine the coverage and the premium. If the person smokes that would be considered a material fact. The smoking habit is a material fact because it exposes the insured to a number of health risks that the insurer will likely cover in the future. This would be different from an immaterial fact, such as the colour of your eyes or hair, which would have no bearing on whether you are insured or the cost of the premiums.
Insuranceopedia Explains Material Fact
Insurance contracts are contracts that each party owes a duty to the other of the utmost good faith. This is unlike most other contractual relationships. The requirement for the duty of good faith is perhaps most pronounced in the case of life and disability policies in which the insured has unique knowledge about his or her own physical condition.
These types of contracts rely on this good faith when it comes to disclosing material facts that will impact the cost and decision in regards to offering insurance coverage. For instance, when an insured fills out the application form for health insurance, a common question about whether or not the insured has smoked in the last two years may be one of the questions.
If, in fact, the insured is a smoker or has ever smoked in the last two years, he should say “YES”. In contrast, if the insured says “No” because he thinks that it does not really matter and he feels good about his current health, it may cause an issue in the future.
When he has to make a claim on his insurance due to hospitalization, it may raise a problem for payment of the claim. When the claim is opened, the insurance company may open the insured's documents. One of those is the question containing the answer to the smoking question. Unfortunately, for the insured, the medical records show that he has been hospitalized due to heart disease caused by his smoking habit. In this case, the insurance company may firmly decline the claim for not disclosing material facts.
Therefore, all material facts must be disclosed honestly to ensure you have the coverage you think you are paying for.