An insurance contract will impose conditions on the insured person or entity. For example, most policies require that the insured give notice of the claim and cooperate with the insurance company. Policies may require that the insured file a formal proof of loss, if the insurer requests one. When one party to a contract commits a material breach of that contract, the other party is discharged or excused from any obligations to perform. In the 1994, Texas Supreme Court opinion, Hernandez v. Gulf Group Lloyds, the court said that the breach be “material.” The court explained stating:
In determining the materiality of a breach, courts will consider, among other things, the extent to which the non-breaching party will be deprived of the benefit that it could have reasonably anticipated from full performance … The less the non-breaching party is deprived of the expected benefit, the less material the breach ….
The other factors courts consider in determining the materiality of a breach are: (1) the extent to which the injured party can be adequately compensated for the part of that breach of which he will be deprived; (2) the extent to which the party failing to perform or to offer to perform will suffer forfeiture; (3) the likelihood that the party failing to perform or to offer to perform will cure his failure, taking account of all the circumstances including any reasonable assurances; (4) the extent to whic the behavior of the party failing to perform or to offer to perform comports with standards of good faith and fair dealing.
Here is a couple of examples:
In the Hernandez case an uninsured/underinsured motorist policy required that the insured obtain the insurer’s consent to settle with the negligent driver. The reason for this was to let the insurer protect its subrogation rights. An insured’s settlement without consent from the insurer was not material and thus did not relieve the insurer of its obligation to pay, when the subrogation rights had no value.
In the 1993, Texas Supreme Court opinion, Liberty Mutual Insurance Co. v. Cruz, a liability insurance policy required that the insured give prompt notice of any suit. The insured did not give notice to the insurer until after a default judgment was rendered against the insured. This breach was material because it prejudiced the insurer by denying its opportunity to answer for the insured and litigate the merits of the suit or to appeal any adverse judgment. The breach relieved the insurer of its obligations under the contract.