Under California Insurance Code Section 334, the materiality of a fact is determined by:
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Answer & full 3-part explanation (select an option above, or peek)
Why B is correct
Section 334 provides that materiality is to be determined not by the event but solely by the probable and reasonable influence of the facts upon the party to whom the communication is due, in forming an estimate of the disadvantages of the proposed contract or in making inquiries. In other words, the test is whether the fact would probably and reasonably have influenced the insurer's decision to accept the risk or set the terms, regardless of whether a loss actually occurred and regardless of whether the insured intended to deceive. Intent to deceive may matter to other fraud doctrines, but it is not the standard by which materiality itself is measured.
Why the other options are wrong
- A) Section 334 expressly rejects the outcome-based test. Materiality is not determined by whether the event or loss actually occurred as a result of the fact. This option reflects a different rule and does not match the law that governs the transaction.
- C) The dollar amount of the policy does not define materiality. The test is the probable influence of the fact on the party receiving the communication. Accordingly, this plausible-sounding answer is one that examiners expect candidates to eliminate.
- D) Intent to deceive is relevant to fraud analysis but is not the materiality standard. Section 334 focuses on probable and reasonable influence on the recipient. This statement does not survive the statutory analysis presented above and is therefore wrong.
Memory hook
Materiality looks forward to influence, not backward to results. Would it have changed the insurer's mind?