Material Fact
What Does Material Fact Mean?
A material fact is critical information necessary for evaluating and interpreting a subject matter in legal documents. It is essential, significant, or relevant to a reasonable person when deciding whether to proceed with a particular transaction.
In insurance, material facts help determine the coverage amount and the premium cost. Insurers use this information to assess the level of risk or the insurance category they are willing to offer. If a material fact is withheld, it may result in the termination of the policy or the contract being declared void.
For instance, a material fact in insurance could be the applicant’s age. Insurance transactions operate under the principle of utmost good faith, requiring all parties to act honestly and ethically, without intentional deceit. For example, when applying for health insurance, a person must disclose their health history to allow the insurer to accurately assess coverage and premium costs. A smoking habit, for example, would be considered a material fact as it indicates increased health risks that the insurer might cover. Conversely, an immaterial fact, such as eye or hair color, has no impact on insurance eligibility or premium rates.
Insuranceopedia Explains Material Fact
Insurance contracts are unique in that they impose a duty of utmost good faith on both parties, unlike most other contractual relationships. This duty is especially significant in life and disability policies, where the insured possesses unique knowledge about their physical condition.
These contracts rely heavily on the honest disclosure of material facts, as these impact the insurer’s decision-making and the cost of coverage. For example, when filling out a health insurance application, the insured may encounter a question about smoking habits in the past two years.
If the insured has smoked during this time, they must answer “YES.” However, if they falsely answer “NO” because they believe their current health is good and the detail is unimportant, this could create significant problems later.
When filing a claim, such as for hospitalization, the insurer will likely review the insured’s medical records. If these records reveal heart disease caused by smoking—a fact the insured failed to disclose—the insurer may reject the claim for nondisclosure of material facts.
To avoid such complications, it is crucial to disclose all material facts honestly, ensuring that the insurance coverage aligns with what the insured expects.
