California Supreme Court Expands Fraud Exception To The Parol Evidence Rule, Eliminating Significant Barrier To Claims Of Promissory Fraud Against Insurers

Last month, the California Supreme Court overruled longstanding precedent and restored to full force the fraud exception to California's parol evidence rule. In Riverisland Cold Storage, Inc. v. Fresno-Madera Production Credit Association, No. S190581 (Cal. Jan. 14, 2013) (Riverisland), the Court held that the parol evidence rule does not exclude evidence of promissory fraud, regardless of whether the fraudulent promise directly contradicts the written terms of the contract at issue. The Riverisland decision removes a significant hurdle that insureds had faced to presenting evidence that insurers had misrepresented the terms of a policy.

The Parol Evidence Rule and Pendergrass

In a contract dispute, such as an insurance coverage dispute, the parol evidence rule generally bars a litigant from introducing evidence of any prior or contemporaneous oral agreement that contradicts the terms of an integrated written agreement. Cal. Civ. Proc. Code § 1856; Cal. Civ. Code § 1625. Courts often describe the purpose of the parol evidence rule to ensure that bargaining parties are able to express a final, deliberate statement of their agreement in writing, and to eliminate uncertainty surrounding prior negotiations where all terms of the agreement are integrated into a single written contract.

The parol evidence rule is subject to a number of important exceptions, including an exception allowing parol evidence of fraud. Cal. Civ. Proc. Code § 1856(g). This fraud exception, however, was significantly limited by the California Supreme Court in a 1935 decision, Bank of America v. Pendergrass, 4 Cal. 2d 258 (1935) (Pendergrass).

The Pendergrass action was filed by Bank of America to recover on a secured promissory note. While the note required payment on demand, the defendant farmers alleged that the bank had assured them that it would not enforce the note until after the farmers had time to raise and sell their crop. According to the farmers, the bank's recovery action was in violation of this promise. Pendergrass, 4 Cal. 2d at 261-62.

The Pendergrass Court refused to permit evidence of the bank's assurance, finding such evidence to be parol evidence and not subject to the fraud exception to the parol evidence rule. Evidence of fraud, the Pendergrass Court held, could only be admitted to establish some independent fact or representation relating to the written contract, such as fraud in the inducement. It could not be introduced to contradict the written...