Materiality is typically measured with reference to the degree of importance that the insurance company ascribes to the omitted or misstated fact. If stating the fact correctly would have significantly affected the conditions or premiums that the company would demand, then the fact is likely material. In the above case, had the full value of the unscheduled property been stated, the insurer would either have demanded that the full value be insured, or that a higher premium be paid for the limited coverage. Thus, the misstatement was clearly material. It should be noted that not all undervaluations are material.
Many insurance contracts do allow some undervaluation where it is unintentional.
This provision is designed to protect the insured from inflation, which causes property to increase in replacement value before the policy's renewal date. A so-called coinsurance clause generally provides that the insured may recover 100 percent of any loss up to the face value of the policy, provided the property is insured for at least 80 percent of its full value. This formula requires you to establish a ratio between the amount of insurance coverage and the total value of the property and then multiply the resulting fraction by the loss to get the recovery. This example points out the importance of carrying insurance on at least 80 percent of the value of your property. Considering inflation, it is wise to reexamine your coverage each year.