After decades of criticism, the California Supreme Court recently overturned Bank of America etc. Assn. v. Pendergrass, 4 Cal.2d 258 (1935) (Pendergrass) which narrowed the fraud exception to the parol evidence rule. Traditionally, the fraud exception allowed a party to present extrinsic evidence (evidence outside of the terms of a contract) to show that an integrated agreement was tainted by fraud. Pendergrass, however, held that evidence of fraud could only be used to “establish some independent fact or representation, some fraud in the procurement of the instrument or some breach of confidence concerning its use, and not a promise directly at variance with the promise of the writing.” Pendergrass, 4 Cal.2d 258, 263.
The California Supreme Court reconsidered Pendergrass in Riverisland Cold Storage Inc., et al. v. Fresno-Madera Production Credit Ass’n, S190581 (Riverisland). There, Plaintiffs Lance and Pamela Workman sought a forbearance agreement from a credit association. The forbearance agreement initially contemplated a three-month term. However, the credit association promised to lengthen the term to two years if the Workmans pledged further collateral. The Workmans pledged two additional parcels of land, but the agreement they signed only reflected three months of forbearance. After three months, the credit association recorded a notice of default. The Workmans sued for fraud.
The trial court granted the credit association’s motion for summary judgment. Following Pendergrass, it reasoned the parol evidence rule barred the Workmans from relying on evidence of fraud. The Court of Appeal reversed the trial court’s decision, concluding Pendergrass only barred evidence of promissory fraud. The California Supreme Court went further by overruling Pendergrass and its progeny, concluding that the parol evidence rule should never be used as a shield to protect misconduct.
Riverisland should increase the volume of insurers’ substantive fraud litigation. Accordingly, insurers should familiarize themselves with the elements of fraud. In particular, they should pay attention to the reliance element, which requires the plaintiff to establish its justifiable reliance on the defendant’s misrepresentation. A party cannot justifiably rely on a misrepresentation if it had a “reasonable opportunity to know of the character or essential terms of the proposed contract.” Rosenthal v. Great Western Fin. Securities Corp., 14 Cal.4th 394, 419. Accordingly, insurers should provide prospective insureds with ample time to learn the essential terms of insurance agreements.