Reconsidering the Fraud Exception to the Parol Evidence Rule and Its Impact on Insurance

March 20, 2013

Insurance LawReconsidering the Fraud Exception to the Parol Evidence Rule and Its Impact on Insurance: 

Riverisland Cold Storage, Inc. v. Fresno-Madera Production Credit Association

Insurance law is a specialized application of general contract law. Judicial decisions that do not involve insurance can have significant implications for contract disputes between insurers and insureds.

The California Supreme Court’s decision in Riverisland Cold Storage, Inc. v. Fresno-Madera Production Credit, 55 Cal. 4th 1169, 151 Cal. Rptr.3d 93, 291 P.3d 316 (2013), involved a dispute between delinquent mortgagor-borrowers and their lender. It will affect coverage disputes in which insureds allege that the insurer or its agent misrepresented policy terms.

Until Riverisland, the California Supreme Court’s broad interpretation of the parol evidence rule in Bank of America National Trust & Savings Ass’n v. Pendergrass, 4 Cal. 2d 258, 48 P. 2d 659 (1935) (Pendergrass), made proof of promissory fraud difficult in California. See, e.g., Diamond Insurance Co. v. Marin County Bikes, 2012 WL 6680259 (N.D. Cal., Dec. 21, 2012) (dismissing fraud claim because alleged oral misrepresentations about insurance coverage contradicted terms of policy). In Riversland, the supreme court ended Pendergass’s 78-year reign and restored the full force of the fraud exception to the parol evidence rule. As a result, insurers and other defendants in fraud and misrepresentation cases are less likely to obtain summary judgment on the ground that the parol evidence rule bars extrinsic evidence of promises “directly at variance with the promise of the writing.” Eastwood Insurance Services, Inc. v. Titan Auto Insurance of New Mexico, 469 Fed. Appx. 596, 2012 WL 619531 (9th Cir. [Cal.] Feb. 27, 2012). During Riverisland’s short reign, insureds already have invoked the decision to defeat parol evidence rule defenses to promissory fraud claims. See Negrete v. Allianz Life Insurance Co. v. North America, __ F. Supp. 2d __, 2013 WL 753475 (C.D. Cal., Feb. 27, 2013).

The Parol Evidence Rule and Pendergrass

In contract disputes, including insurance contract disputes, the parol evidence rule bars a litigant from introducing extrinsic evidence that contradicts the terms of an integrated written agreement. The parol evidence rule in California is subject to an exception allowing parol evidence to establish fraud.  See, e.g., California Code of Civil Procedure § 1856(g). Despite this statutory language, the Pendergrass court severely restricted fraud exception, limiting it to proof of fraud in the execution of a contract—essentially that the proponents of extrinsic evidence believed they were signing a different agreement than they signed.

Examples of “fraud in the execution” include a party’s substitution of a new document of the same kind as the one previously read and agreed to by the other party but containing materially different terms. Under Pendergrass, the fraud exception did not permit proof of promissory fraud based on a prior or contemporaneous oral agreement that contradicts the terms of a written agreement.

Pendergrass Revisited and Overruled

Rather than attempt to sort out and clarify the “tenuous” distinctions employed to avoid the harsh results under Pendergrass, the Riverisland court unanimously overruled Pendergrass “and its progeny.”  Justice Corrigan’s opinion thoroughly repudiates Pendergrass, stating that the decision was “bad policy,”“poorly reasoned,” and an “aberration” that “led to instability in the law.” The overriding concern expressed by the court was that the Pendergrass rule, “while intended to prevent fraud, . . . may actually provide a shield for fraudulent conduct.” 55 Cal.4th at 1172.

Our next post will examine the implications of Riverisland for insurance litigation.