Implications of Riverisland for Insurance Litigation

March 27, 2013

Insurance LawOur last post discussed the California Supreme Court’s decision in Riverisland Cold Storage, Inc. v. Fresno-Madera Production Credit. By allowing extrinsic evidence of promises “directly at variance” with the language of a written contract, the court’s decision removed a significant hurdle to recovery for promissory fraud.

But other obstacles remain. As the supreme court observed, recovery for promissory fraud requires more than “proof of an unkept promise or mere failure of performance.” Plaintiffs must still satisfy the heightened pleading standard for fraud actions, which requires that each element of a fraud claim be alleged with particularity.

Justifiable Reliance

California follows the rule, which if not a universal rule is the clear majority rule in the United States, that justifiable reliance is an element of  fraud or misrepresentation claims. Insurance companies faced with promissory fraud claims will frequently defend against such accusations with the argument that their insureds’ admissions that they did not read the policy preclude proof of justifiable reliance.

In Rosenthal v. Great Western Fin. Securities Corp., 14 Cal.4th at 419, the supreme court ruled that a plaintiff’s failure to read the contract at issue precluded a claim for fraud in the execution of the contract. In Riverisland, however, the court was careful to limit Rosenthal to fraud in the execution claims and refused to “explore the degree to which failure to read the contract affects the viability of a claim of fraud in the inducement.” 55 Cal.4th at 1183. [Emphasis added.]

In the insurance context, a line of California cases has held that an insured who fails to read her policy cannot establish the justifiable reliance element of a cause of action for fraud based on her insurer’s false representations regarding coverage where the policy excludes coverage in plain, clear, and conspicuous language. See, e.g., Hadland v. NN Investors Life Ins. Co., 24 Cal.App.4th at 1584–1587. However, other cases have distinguished the rulings in such cases on the ground that, when there is no dispute regarding the policy terms or their meaning, but instead the dispute concerns an agent actively misleading an applicant/insured as to the effect of the policy terms, then the insured’s failure to read the policy does not defeat justifiable reliance. Paper Savers, Inc. v. Nacsa, 51 Cal.App.4th 1090, at 1102Broberg v. Guardian Life Ins. Co. of Am., 171 Cal.App.4th at 923; Dias v. Nationwide Life Insurance Company.

The California Supreme Court in  Engalla v. Permanente Medical Group, Inc., 15 Cal.4th at 976-977, ruled that a presumption, or at least an inference, of reliance arises wherever there is a showing that a misrepresentation was material. But the Engalla court had no need to address whether an insured’s failure to read the policy precludes a court from inferring reliance from the materiality of the misrepresentation. The plaintiffs’ representative in that case had read the provision at issue. The supreme court could have clarified the broader applicability of the Engalla reliance analysis in Riverisland, but chose not to do so. Consequently, the full impact of the Riverisland decision on insurance disputes remains unsettled.