New York Court Rules that Professional Services Exclusion Bars Coverage for Underlying Actions Brought By FINRA and Private Investors

April 11th, 2013

By Eryk Gettell, Sedgwick San Francisco

In David Lerner Associates, Inc. v. Philadelphia Indemnity Insurance Company, 2013 WL 1277882 (E.D.N.Y. Mar. 29, 2013), the United States District Court for the Eastern District of New York affirmed the plain meaning of the words “professional services”. 

Philadelphia Indemnity Insurance Company (“Philadelphia”) – represented by Sedgwick LLP in the coverage action – issued a D&O liability policy to the brokerage firm David Lerner Associates, Inc. (“DLA”).  The policy contained a “professional services” exclusion, however it did not define the words “professional services”.

The Financial Industry Regulatory Authority (“FINRA”) brought a disciplinary proceeding against DLA, alleging that it misrepresented the value of certain real estate investment trust (“REIT”) shares sold to investors, and failed to perform adequate due diligence in marketing those shares.  Shortly thereafter, three related class action lawsuits were brought against DLA.  DLA tendered the FINRA proceeding and the related class actions to Philadelphia for coverage.

Philadelphia denied coverage based on the “professional services” exclusion.  DLA sued for declaratory relief and breach of contract.

The court was asked to consider whether the due diligence carried out by DLA in the course of providing investment advice constituted a “professional service” for purposes of the exclusion, and concluded it did.  In rejecting DLA’s argument that the exclusion was ambiguous merely because the words “professional services” were not defined, the court reasoned that undefined terms “should be read in light of common speech and the reasonable expectations of a business person”.  

The court was not persuaded by DLA’s argument that financial advisors do not perform “professional services” because they are not considered professionals in the malpractice sense, explaining that in the context of liability insurance “professional services” encompassed a broader range of activities. 

The court also rejected the theoretical argument that DLA’s actions were only “ministerial” in nature because “performing a due diligence analysis and marketing financial products requires specialized knowledge and training, and is not a rote activity performed by a professional”. 

Discovery was unnecessary to determine whether the exclusion applied because DLA’s alleged failings fell within the scope of the exclusion on their face. 

 

Supreme Court of Washington Holds that Insurers Are Not Entitled to Reimbursement of Non-Covered Defense Costs

April 4th, 2013

By Eryk R. Gettell, Sedgwick San Francisco

In a 5-4 decision, the Washington Supreme Court held that an insurer may not recover defense costs incurred under a reservation of rights while the insurer’s duty to defend is undetermined.  National Sur. Corp. v. Immunex Corp., No. 86535-3 (Wash. Mar. 7, 2013).  Although not addressed by the court, the ruling likely only applies to duty to defend policies, as opposed to policies that require the insurer to reimburse defense costs.  The decision is also important because the court confirmed that insureds under duty to defend policies may recover their pre-tender defense costs, unless the insured’s late tender prejudiced the insurer.

National Surety Corporation issued excess and umbrella liability insurance policies to Immunex Corporation for the period from 1998 to 2002.  In August 2001, Immunex notified National Surety that it was under government investigation concerning its wholesale drug pricing.  Beginning in 2001, Immunex was sued in more than twenty actions for claims regarding its alleged price fixing of wholesale drugs.  In October 2006, Immunex tendered its defense of the lawsuits to National Surety.

National Surety issued its reservation of rights letter to Immunex in March 2008.  National Surety advised that, while it did not believe the litigation was covered, it still needed to complete its coverage investigation.  National Surety agreed to defend Immunex until it could obtain a judicial declaration regarding whether the litigation was covered.  National Surety advised that it would reimburse Immunex’s post-tender defense costs, but also reserved the right to recoup any defense costs if it was later determined that there was no coverage, and that National Surety was entitled to reimbursement.

In March 2008, National Surety filed a declaratory judgment action against Immunex in state court.  The trial court ruled that National Surety did not have a duty to defend, but also that National Surety was still responsible for Immunex’s defense costs through the court’s coverage ruling, subject to a set-off if the insured’s late tender was prejudicial.  Both parties appealed, and the Court of Appeals affirmed the trial court’s decision.  National Surety then appealed to the Washington Supreme Court.

The court’s analysis began with a discussion of Washington’s duty to defend principles, as well as the public policy concerns that are implicated by duty to defend policies.  The majority emphasized that, because the duty to defend is broader than the duty to indemnify, an insurer must defend its insured if a reasonable interpretation of the facts or law could result in coverage.  If the insurer is uncertain as to its duty to defend, it may defend under a reservation of rights, and seek a declaratory judgment relieving the insurer of its duty to defend.  The majority stressed that by doing so, the insurer benefits because it avoids breaching its duty to defend, as well as other potential downsides such as a bad faith finding, waiver, and estoppel.

After considering how other jurisdictions have ruled on this issue, the court sided with the minority of jurisdictions, and explained that “[disallowing reimbursement is most consistent with Washington cases regarding the duty to defend, which have squarely placed the defense decision on the insurer’s shoulders.”  The court held that an insurer cannot receive protection from bad faith claims or breach of contract without any responsibility for defense costs if there is a later determination of no duty to defend because, “[t]his ‘all reward, no risk’ proposition renders the defense portion of the reservation of rights defense illusory,” and the insured would “receive no greater benefit than if its insurer had refused to defend out right.”

The court also addressed two related issues: (1) whether National Surety was required to reimburse Immunex’s pre-tender defense costs; and (2) whether Immunex’s late tender prejudiced National Surety, such that it was relieved of any responsibility for defense costs.  With respect to the pre-tender defense costs issue, the court held that an insured under a duty to defend policy is entitled to recover its pre-tender defense costs, except where the late tender has prejudiced the insurer.  However, the court ruled that summary judgment on the issue of prejudice was inappropriate because there were disputed facts as to this issue.

The dissent criticized the majority’s sweeping determination that insurers may never recover defense costs under a reservation of rights.  The dissent argued that the court should follow the approach used by the majority of jurisdictions which looks to whether the insurer’s payment of the insured’s defense costs would unjustly enrich the insured.  The dissent also disagreed with the majority’s view that the unjust enrichment issue was “simply irrelevant,” because National Surety did not receive any “benefit” simply by complying with its duties under the law.

The Immunex decision is a significant departure from the majority of jurisdictions which allow insurers to recoup their defense costs based on equitable considerations when there is a finding of no coverage.  It is important to note, however, that the court’s decision was largely influenced by Washington’s rules concerning duty defend to defend policies.  If the policy at issue had a duty to reimburse defense costs (in which the insured controls its own defense), the court likely would have permitted the insurer to recoup its defense costs incurred under the reservation of rights.

This case is just one of a few recent Washington decisions that the Insurance Law Blog has reported on. Please click here to see posts about other recent Washington decisions impacting insurers.

An American Export: Contingency Fees Adopted in the UK

April 4th, 2013

By Mark Chudleigh, Sedgwick Bermuda

It has taken nearly 20 years for the United Kingdom to move from a time when it was unlawful (or champertous) for a lawyer to share in the fruits of litigation, to the introduction of U.S.-style contingency fee arrangements.  Although the legislators have shied away from using the expression “contingency fee” – instead naming them “Damages-Based Agreements” or “DBAs” – they are in all respects a contingency fee arrangement whereby lawyers can retain a percentage of the damages of up to 25% in personal injury cases, 35% in employment cases, and 50% in most other cases. These arrangements are now lawful in the U.K. with effect from April 1, 2013.

The impact on litigation and on insurers is likely to be significant, as a U.S.-style plaintiff bar develops and seeks to make                U.S.-style returns from litigation.  This will be fueled by the growth of the litigation funding industry, which includes the use of bespoke “after-the-event” insurance solutions to protect plaintiffs from the risk of adverse costs exposure in the event litigation is unsuccessful.

Where the U.K. leads, other countries may follow.  Several countries – Australia, New Zealand, Hong Kong and Bermuda for example – have legal systems based on English law and may look to enact similar legislation.  Insurers and reinsurers with exposure to these countries should watch developments closely, as will we, and will provide updates on any developments.

Prevailing Party Fees are Not Recoverable in Cases Arising Under Admiralty Jurisdiction

March 22nd, 2013

By Charles S. Davant, Sedgwick Fort Lauderdale

Insurers with marine risks in Florida should be wary of an evolving conflict among Florida’s lower appellate courts regarding the applicability of Florida’s Offer of Judgment Statute (ch. 768.79) to claims governed by admiralty law. Compare Nicoll v. Magical Cruise Co., Ltd., No. 5D11-1039, 38 Fla. L. Weekly D624b, 2013 WL 1007679 (Fla. 5th DCA Mar. 15, 2013) with Royal Caribbean Corp. v. Modesto, 614 So. 2d 517 (Fla. 3d DCA 1992).

In Nicoll, plaintiff Fay Nicoll slipped and fell aboard a cruise ship owned by Magical Cruise Company. During the course of litigation, Magical served an Offer of Judgment in accordance with Florida Statute 768.79. The statute allows a party in a civil action to serve an offer of judgment for a specific dollar amount. If rejected or not accepted within 30 days, the serving party is entitled to recover costs and attorney’s fees from the date of service if the serving party beats their offer of judgment by more than 25 percent. For defendants, this means obtaining a judgment of no liability or one that is 25 percent less than its offer; for plaintiffs, this means recovering a judgment for more than 25 percent of its offer.

Nicoll rejected Magical’s offer. Magical subsequently prevailed on a motion for summary judgment and moved for fees according to the statute. The trial court denied Magical’s motion for attorney’s fees and Florida’s Fifth District Court of Appeal affirmed. In so holding, the Court found that entitlement to attorney’s fees under Florida’s statute is a substantive right; thus, the Court must apply federal maritime law to substantive issues arising under admiralty jurisdiction. Under federal admiralty law, a prevailing party is generally not entitled to attorney’s fees, even when a state statute establishes entitlement to such fees. Thus, the Court rejected Magical’s claim for fees.

The opinion recognized a conflict with the Third District Court of Appeal’s decision in Royal Caribbean Corp. v. Modesto, 614 So. 2d 517 (Fla. 3d DCA 1992). The Modesto Court found no conflict between Florida’s rules of law regarding offers of judgment and federal maritime law, stating the rules relating to offers of judgment are an integral part of the state’s management of its courts’ proceedings. The continued validity of Modesto was recently questioned by the Third District Court in Royal Caribbean Corp. v. Cox, No. 3D09-2712, 29 Fla. L. Weekly D2029, 2012 WL 3587008 (Fla. 3d DCA Aug. 22, 2012). However, Modesto remains good law in the Third District Court of Appeal and its conflict with the Fifth District’s decision in Nicoll remains.

 

Second Circuit Holds That Insurers May Recover Overpayments of Benefits Under ERISA

March 20th, 2013

By Julie Y. Kim, Sedgwick New York

On March 13, the Second Circuit issued a significant opinion interpreting key provisions of the Employee Retirement Income Security Act (“ERISA”).  In Thurber v. Aetna Life Ins. Co., Case No. 12-370-cv, 2013 WL 950704 (2d Cir. Mar. 13, 2013), the court affirmed the order of the District Court for the Western District of New York to the extent it dismissed the plaintiff’s ERISA § 502(a)(1)(B) claim, but reversed the District Court’s denial of Aetna’s counterclaim pursuant to ERISA § 502(a)(3) to recover overpayment of short-term disability (“STD”) benefits.  In reaching its decision, the court held that ERISA plan administrators are not required to provide actual notice to participants and beneficiaries of a plan’s grant of discretionary authority to an insurer or other claim fiduciary, and that Aetna’s counterclaim to recover its overpayment of STD benefits constituted equitable – not legal – relief, and was permissible under ERISA § 502(a)(3).

On appeal, the Second Circuit disagreed with the Seventh Circuit to the extent that its holding in Herzberger v. Standard Ins. Co. interpreted ERISA as requiring actual notice to plan participants of a reservation of discretionary authority, reasoning that “unless ERISA requires the SPD [summary plan description] to contain language setting the standard of review, we see no reason why a plan administrator must actually notify a participant of its reservation of discretion.  ERISA contains no such edict.”  Affirming the district court’s summary judgment in favor of Aetna on its denial of Thurber’s long-term disability benefit claim, the court agreed that Aetna did not act arbitrarily and capriciously and its determination was supported by substantial evidence.

Notably, the Second Circuit reversed the District Court’s dismissal of Aetna’s counterclaim to recover its overpayment of STD benefits based on Thurber’s receipt of other income benefits in the form of no-fault insurance payments.  Discussing Supreme Court decisions analyzing the issue, the Second Circuit held that Aetna’s counterclaim was equitable in nature because the insurer sought specific funds (overpayments resulting from Thurber’s simultaneous receipt of no-fault insurance benefits and STD benefits) in a specific amount (the total overpayment) as authorized by the plan, that had been entrusted to Thurber.  Acknowledging a Circuit split on the issue, the court determined that a different result was not warranted because either (1) Aetna sought to recover a specific portion of benefits rendered overpayments rather than the actual third-party income Thurber received, or (2) the overpayments made had since been dissipated.  The plan clearly provides Aetna the right to recover benefits rendered overpayments, giving Thurber adequate notice that she was holding the money in a constructive trust, and the funds were under her control but belonged to the insurer.

In issuing this precedential opinion, the Second Circuit specifically rejected the Ninth Circuit’s recent decision in Bilyeu v. Morgan Stanley Long Term Disability Plan, 683 F.3d 1083 (9th Cir. 2012), which denied insurers the right to pursue recovery of overpayment under ERISA.  It seems likely that there will be significant court activity regarding this issue as courts continue to struggle with interpreting what claims constitute “equitable” relief permissibly sought under ERISA § 502(a)(3).

NJ’s Bad Faith Legislation Stemming From Superstorm Sandy Needs Emergency Relief

March 19th, 2013

By Jeffrey M. Winn and Ryan C. Chapoteau, Sedgwick New York

In the wake of Superstorm Sandy, the New Jersey Legislature is considering the passage of A3710, which will enable policyholders to sue insurers for bad faith based on a single alleged violation of the New Jersey Insurance Trade Practices Act, NJSA § 17:29B-1, et seq.

The proposed legislation is unnecessary and will just promote more litigation, delay the resolution of first-party claims, disturb New Jersey’s current landscape of thoughtful and termperate common law remedies, and result in higher premiums for all policyholders. Although the proposed legislation may be a boon for lawyers, it likely will be a losing proposition for virtually everyone else.

Prior to Superstorm Sandy, the New Jersey Legislature and the courts had carefully crafted a comprehensive framework of rules, causes of action, and damages measures which have adequately protected the public against the bad faith claims settlement practices of insurers.  For example, in Rova Farms Resort v. Investors Ins. Co., 65 N.J. 474, 323 A.2d 495 (1974), the New Jersey Supreme Court prescribed a cause of action that protects policyholders from excess verdicts.  In Pickett v. Lloyd’s, 131 N.J. 457, 621 A.2d 445 (1993), the Supreme Court conducted a thorough national survey of insurance bad faith decisions before adopting the centrist “fairly debatable” test for New Jersey first-party bad faith claims, thereby rejecting the extreme standards that prevail in some jurisdictions.

While New Jersey already permits policyholders to recover extra-contractual damages against insurers, both the Legislature and courts have adroitly balanced the competing interests.  The Supreme Court in Pickett posited that, when the policyholder has demonstrated that the insurer has engaged in bad faith, the policyholder may recover consequential damages (including attorneys’ fees) and punitive damages.  On liability insurance disputes, prevailing policyholders are generally permitted to recover their costs and fees if they can satisfy the elements of New Jersey Civil Practice Rule 4:42-9(a)(6).  Thus, the remedies are in place and the public is adequately protected.

Policyholder attorneys dislike the Pickett standard because it requires a showing of “gross negligence” by the insurer.  This middle-of-the-road standard eschews the extreme liberal standard of simple negligence advocated by policyholder attorneys, and the extreme conservative standard of “intentional wrongdoing” favored by some insurance industry advocates.  In adopting the Pickett standard, the Supreme Court sent the strong message that bad faith claims should not be a routine add-on to the typical insurance coverage dispute, but should be reserved for sufficiently reckless conduct by the insurer.  The Supreme Court was clear that, to make out an actionable bad faith claim, “simple negligence” is not enough.

The proposed legislation will eviscerate the time-honored Pickett standard.  If enacted, the legislation will unsettle the New Jersey insurance market by equating bad faith with simple negligence, thus making bad faith claims commonplace in most first-party cases.  In the interest of maintaining a stable insurance market in New Jersey, the proposed legislation should not be adopted.

Causation is Not Elementary, My Dear

March 15th, 2013

By Chen Foley, Sedgwick Bermuda

Sherlock Holmes famously said, “when you have eliminated the impossible, whatever remains, however improbable must be the truth.”  This reasoning has been adopted by trial judges seeking to resolve questions of causation.  In Nulty & Others v Milton Keynes Borough Council [2013] EWCA Civ 15 [Here*] the English Court of Appeal found that a judge was wrong to do so.  It concluded that, where there are multiple causation scenarios, each of which is unlikely, the court is not entitled to favor the scenario that is the least unlikely.

Mr. Nulty carried out repair work at a recycling plant.  While on a break, a fire broke out in the area where he was working, causing extensive damage.  The owner blamed Mr. Nulty for the fire and sued him. His liability insurers defended the action.

The trial judge indentified three possible causes of the fire: (1) a carelessly discarded cigarette, (2) arcing from a live cable, and (3) arson.  He concluded that, although it might be unlikely that an experienced electrical engineer would discard a cigarette in a dangerous manner, the two other scenarios were even more unlikely.  Having eliminated the two most unlikely scenarios, he concluded the remaining one was the true cause of the fire.

The insurers appealed.  The Court of Appeal found that the judge’s reasoning was flawed.  The claimant must prove on the balance of probabilities the cause of its loss; and it is for the judge to examine the evidence produced by the claimant to determine if causation has been proved.  If the judge is unable to reach a decision on the evidence, he is required conclude that the claimant has not proved its case.  Where the evidence suggests a scenario is improbable, a finding by the court that it was nevertheless more likely to have occurred than another does not accord with common sense.

Trial judges have been cautioned against reaching conclusions on causation by merely seeking to eliminate implausible scenarios.  Doing so runs the risk of the judge settling on the least unlikely cause, without having regard to whether there is sufficient evidence establishing that it is, in fact, the true legal cause.

The decision is a helpful reminder to insurers engaged in defending their insureds of the evidentiary burden that must be satisfied when establishing causation.  This is particularly so where, as in Nulty, the claimant relies on circumstantial evidence alone to do so.

Florida High Court Narrows Application of Economic Loss Rule to Product Liability Actions

March 12th, 2013

By Robert C. Weill, Sedgwick Ft. Lauderdale

In a dramatic reversal of established precedent, the Florida Supreme Court on March 7, 2013 held in a 5-2 decision that the economic loss rule only applies to product liability actions.  Tiara Condo. Ass’n v. Marsh & McLennan Cos., No. SC10-1022, 2013 WL 828003 (Fla. Mar. 7, 2013).  The case was before the Court on a question certified by the Eleventh Circuit Court of Appeals, which asked whether the economic loss rule exception for professionals applies to insurance brokers.  Rather than answer the issue framed by the Eleventh Circuit, the Court restated the certified question to broaden the issue before it as follows:  “Does The Economic Loss Rule Bar An Insured’s Suit Against An Insurance Broker Where The Parties Are In Contractual Privity With One Another And The Damages Sought Are Solely For Economic Losses?” Slip op. at 2 (all caps omitted). The Court answered the rephrased certified question in the negative, holding that the application of the economic loss rule is limited to products liability cases.

The majority of the Court reasoned that the Court “will depart from precedent as it does here when such departure is necessary to vindicate other principles of law or to remedy continued injustice.” Slip op. at 18 (internal citations omitted). Additionally, the Court noted “[s]tare decisis will also yield when an established rule has proven unacceptable or unworkable in practice.” Id. The Court believed that the repeated creation of exceptions to the rule over time, “now demonstrates that expansion of the rule beyond its origins was unwise and unworkable in practice.”  Slip op. at 18.  The Court’s decision, therefore, “return[ed] the economic loss rule to its origin in products liability.”  Id.  Interestingly, the concurring opinion noted that the majority of the Court did not view its decision as a “departure from precedent,” but instead viewed its decision as “the culmination of the Court’s measured articulation of the economic loss rule’s original intent.”  Slip op. at 19 (Pariente, J., concurring).

Chief Justice Polston and Justice Canady dissented with opinions.  Judge Polston noted that as a result of the decision “there are tort claims and remedies available to contracting parties in addition to the contractual remedies, which, because of the economic loss rule, were previously the only remedies available.”  Slip op. at 26 (Polston, C.J., dissenting).  To state it more simply, every breach of contract claim now will be accompanied by a tort claim or claims.  See Slip op. at 35 (Canady, J., dissenting).

 

Washington Supreme Court Presumes that First-Party Insurers May Not Assert Attorney-Client Privilege or Work Product Protection in Bad Faith Actions

March 5th, 2013

By Robert A. Meyers, Sedgwick Seattle

In Cedell v. Farmers Ins. Co. of Washington, No. 85366-5 (Wash. February 21, 2013), a 5-4 majority of the Washington Supreme Court established a new framework for evaluating attorney-client privilege and work-product issues in bad-faith lawsuits against first-party insurers. The framework does not apply to bad-faith lawsuits involving underinsured motorist (“UIM”) coverage.

First, the Court declared that it will presume that a first-party insurer may not assert the attorney-client privilege or work-product protection in a bad faith lawsuit.

Second, the Court held that an insurer may seek to rebut that presumption by demonstrating that the insurer’s attorney “was not engaged in the quasi-fiduciary tasks of investigating and evaluating or processing the claim, but instead providing the insurer with counsel as to its own potential liability; for example, whether or not coverage exists under the law.” If the insurer can satisfy that burden, it should be entitled to an in camera review of the disputed information and the redaction of privileged and protected information.

Third, the Court held that, even if the insurer successfully rebuts the presumption, the insured may seek to pierce the attorney-client privilege by demonstrating that “a reasonable person would have a reasonable belief that an act of bad faith has occurred.” In that event, the trial court would conduct an in camera review of the privileged materials, and if the trial court determines that “there is a foundation to permit a claim of bad faith to proceed,” it will declare that the insurer has waived its attorney-client privilege.

Following the Court’s ruling, in future bad-faith lawsuits relating to first-party insurance claims one can reasonably anticipate some confusion and disagreement about whether the insurer’s attorney’s conduct constituted “counsel as to [the first-party insurer’s] liability” which would be subject to the attorney-client privilege, or a “quasi-fiduciary task” that would not be subject to the privilege. Moreover, a first-party insurer should be keenly aware that if its attorney undertakes tasks that could be construed to be quasi-fiduciary tasks such as investigating, evaluating, or processing the first-party claim, [1] the insurer’s communications with its attorney relating to those tasks might not be privileged and [2] the attorney’s work product relating to those tasks might not be protected. Because of that, if a first-party insurer’s attorney undertakes such quasi-fiduciary tasks, it might behoove the insurer and its attorney to establish separate files that relate to those tasks.

Opinion:
http://www.courts.wa.gov/opinions/?fa=opinions.disp&filename=853665MAJ

Dissent:
http://www.courts.wa.gov/opinions/?fa=opinions.disp&filename=853665Di1

 

Pendergrass: The 78 Year Reign has Ended

March 4th, 2013

By David M. Ajalat, Sedgwick San Francisco

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.

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