Legal Definitions - Materiality

Materiality refers to the significance or importance of a fact, piece of information, or omission in a given situation. A fact is considered material if its disclosure or omission would likely influence the decision-making of a reasonable person. In legal contexts, materiality determines whether a particular detail is crucial enough to affect the outcome of a case, a contract, a regulatory decision, or an investment choice.

Here are some examples to illustrate the concept of Materiality:

• Example 1: Real Estate Transaction

  Imagine a homeowner selling their house. They know that the basement frequently floods during heavy rain, requiring extensive cleanup and repairs. When filling out the disclosure forms for potential buyers, they intentionally omit this information.

  How this illustrates Materiality: The recurring flooding is a material fact. A reasonable buyer would almost certainly want to know about such a significant and costly issue before deciding to purchase the house or determining the price they are willing to pay. The omission of this information could materially affect their decision.

• Example 2: Investment Decision

  A publicly traded technology company is about to announce that its flagship product, which accounts for 70% of its revenue, has a critical design flaw that will require a complete recall and redesign, leading to a significant financial loss. Before this announcement, a company executive sells a large portion of their personal stock holdings.

  How this illustrates Materiality: The impending product recall and financial loss are material facts. This information would undoubtedly influence an investor's decision to buy, sell, or hold the company's stock. The executive's sale of stock before this public disclosure could be considered insider trading because they acted on material non-public information.

• Example 3: Insurance Application

  When applying for car insurance, an individual is asked about their driving history, including any accidents or traffic violations. The applicant fails to disclose that they received a speeding ticket just last month and were involved in a minor fender-bender two years ago, for which they were at fault.

  How this illustrates Materiality: The undisclosed speeding ticket and at-fault accident are material facts. An insurance company uses this type of information to assess risk and calculate premiums. Knowing about these incidents would likely change the insurer's decision to offer coverage at a particular rate, or even to offer coverage at all. The omission could lead to the policy being voided if discovered later.