Title: Village Northridge v. State Farm Ins.

State: california

Issuer: California Supreme Court

Document:

1 
Filed 8/30/10 
 
 
 
 
IN THE SUPREME COURT OF CALIFORNIA 
 
 
 
VILLAGE NORTHRIDGE 
) 
HOMEOWNERS ASSOCIATION, 
) 
 
 
) 
 
Plaintiff and Appellant, 
) 
 
 
) 
S161008 
 
v. 
) 
 
 
) 
Ct. App. No. B188718 
STATE FARM FIRE AND CASUALTY 
) 
COMPANY 
) 
 
) 
Los Angeles County 
 
Defendant and Respondent. 
) 
Super. Ct. No. BC265328  
 ___________________________________ ) 
 
We granted review to determine whether an insured who suffered property 
damage in the 1994 Northridge, California, earthquake may settle a disputed insurance 
claim with its first party insurer, execute a full and complete release of the claim, keep 
the money the insurer paid in the claim settlement without rescinding the release, and 
then sue the same insurer for allegedly fraudulently inducing the insured to settle the 
claim for less than it was worth under the policy.  Although the insured here signed a 
release and waiver of all future claims, it seeks to bypass the statutory and common law 
rules governing rescission of a release, and instead to take advantage of a more general 
contract rule that a party to a contract may elect to affirm the contract and sue for fraud 
damages.  (See 5 Witkin, Summary of Cal. Law (10th ed. 2005) Torts §§ 827-828, 
pp. 1200-1201.)  Consistent with long-settled case law and the relevant state statutory 
scheme that specifically governs rescission of contracts, including releases, under Civil 
Code sections 1691 through 1693, we conclude that a release of a disputed claim, like the 
one here, does not permit a party to elect the remedy of a suit for damages when the 
2 
release itself bars that option. 1  Instead, the insured party to the release must follow the 
rules governing rescission of that release before suing the insurer for damages.   
FACTUAL AND PROCEDURAL BACKGROUND 
The 1994 Northridge earthquake caused considerable damage to property that 
plaintiff Village Northridge Homeowners Association (Village Northridge) owned.  
Village Northridge filed a timely property damage claim with its insurer, State Farm Fire 
and Casualty Company (State Farm).  According to declarations filed in the trial court, 
State Farm‘s policy limits for earthquake damage were $4,979,900, with a 10 percent 
deductible.  State Farm made several payments to Village Northridge on the earthquake 
loss, totaling about $2,068,000, which included the deductible calculation.  In 1996, and 
again in 1998, Village Northridge sought additional policy benefits based on the opinion 
of a public adjuster who recalculated the deductible amount under the State Farm policy 
after the insured found a different declarations page in storage.  State Farm reinspected 
the property and concluded that some of the additional damage was earthquake related, 
while other damage was not.  State Farm initially paid Village Northridge an additional 
$7,466.34. 
 In November 1999, although both parties continued to dispute the policy limits 
and the amount of money owed, they negotiated a compromise settlement of the claim, 
with State Farm paying an additional $1.5 million.  Under the settlement, Village 
Northridge released State Farm from all known or unknown claims related in any way to 
Village Northridge‘s earthquake claim.  In the release‘s first paragraph, Village 
                                              
1 
Civil Code section 1691 provides in relevant part:  ―Subject to Section 1693, to 
effect a rescission a party to the contract must, promptly upon discovering the facts which 
entitle him to rescind if he is free from duress, menace, undue influence or disability and 
is aware of his right to rescind:  [¶] (a) Give notice of rescission to the party as to whom 
he rescinds; and [¶] (b) Restore to the other party everything of value which he has 
received from him under the contract or offer to restore the same upon condition that the 
other party do likewise, unless the latter is unable or positively refuses to do so.‖  Section 
1693 modifies the timing requirement in ways we discuss further below. 
 
All statutory references are to the Civil Code unless otherwise noted. 
3 
Northridge specifically agreed to ―refrain and forbear from commencing, instituting, or 
prosecuting any lawsuit, action, or any other proceeding against [State Farm] based on, 
arising out of, or in connection with any claims, actions, causes of action, charges, 
demands, contracts, covenants, liabilities, obligations, expenses . . . and damages that are 
released and discharged.‖  Paragraph one also unconditionally released State Farm from 
―damages of every nature, kind, and description whatsoever‖ that ―arise out of or are in 
any way related to the Earthquake Claim.‖  In addition, Village Northridge waived any 
benefit it might derive under section 1542 (stating principally that a general release does 
not extend to unknown claims), including the right to assert those claims, ―if any, which 
they do not know about or suspect that they may have and even those, if any, which they 
may not learn about or discover until after they sign‖ the release.2 
 
The pertinent insurance regulations (Cal. Code Regs., tit. 10, §§ 2695.4, subd. 
(e)(2), 2695.7, subd. (h)) specifically permit an insurer to include a provision in release 
agreements requiring insureds to waive section 1542 claims, or those unknown to them at 
the time of settlement and release.  Such waiver allows an insured to assume the risk that 
it may discover new damage claims in the future.  In exchange, the insured receives 
consideration and settlement of the claims known at the time of the release.  (See San 
Diego Hospice v. County of San Diego (1995) 31 Cal.App.4th 1048, 1053-1054 [parties 
may expressly waive future § 1542 claims].)  In late 2000, Village Northridge asked State 
Farm to reopen the claim.  The insurer declined to do so. 
 
In December 2001, after the Legislature revived insurance claims that the statute 
of limitations otherwise barred, Village Northridge sued State Farm for breach of contract  
                                              
2  
Section 1542, which governs general releases, states:  ―A general release does not 
extend to claims which the creditor does not know or suspect to exist in his or her favor at 
the time of executing the release, which if known by him or her must have materially 
affected his or her settlement with the debtor.‖ 
4 
 
and breach of the implied covenant of good faith and fair dealing.3  The complaint 
alleged that State Farm had undervalued the earthquake loss to Village Northridge‘s 
property and had induced Village Northridge to forgo proper repairs and payment of 
sums owed under the policy.  Village Northridge also alleged that it ―was required to sign 
a release and did so under compulsion and with no other option afforded to secure partial 
benefits owed,‖ and that it did not agree ―that the partial payments provided fully 
compensated [Village Northridge] for the actual damages and loss sustained at Village 
Northridge‘s property. . . .‖  Throughout the litigation, Village Northridge insisted that it 
did not seek to rescind the settlement agreement and that it did not intend to do so.  
Instead, as noted, it wanted to bypass the rescission requirements to affirm the release and 
to seek additional damages.  
 
State Farm filed a motion for summary judgment, contending that the release 
Village Northridge executed barred its lawsuit for additional coverage.  In its opposition 
to the motion, Village Northridge claimed that its insurance policy provided coverage 
limits of $11,905,500, with a 10 percent deductible.  Village Northridge alleged that in 
the course of adjusting its claim and inducing it to execute the release, State Farm 
misrepresented the policy limits to be only $4,979,900, with the same deductible.  The 
trial court granted State Farm‘s summary judgment motion.  The court concluded that 
State Farm had not procured the release agreement through undue influence or fraud, and 
that the release was therefore binding on the parties.   
 
The Court of Appeal reversed the judgment, concluding there were triable issues 
of fact as to whether the release contained in the settlement agreement was enforceable. 
The Court of Appeal remanded the matter to the trial court, which granted State Farm‘s 
motion for judgment on the pleadings with leave to amend.  The trial court observed that 
                                              
3  
In January 2001, Code of Civil Procedure section 340.9 (added by Stats. 2000, ch. 
1090, § 1) became effective and revived previously time-barred claims for damages 
arising out of the Northridge earthquake, as long as the insured had contacted the insurer 
before January 1, 2000, which is the case here.   
5 
the complaint did not allege fraud in the inducement or rescission and that, under 
California law, Village Northridge ―need[ed] to either rescind the agreement or affirm the 
agreement and sue for damages.‖4 
 
Village Northridge then filed a second amended complaint that was substantially 
similar to the first.  The complaint alleged that the $1.5 million additional settlement 
State Farm paid was grossly deficient and represented only a partial payment of an 
alleged total loss of $8 million.  The complaint also stated that the court had the inherent 
power to set aside a release procured by fraud.  Again, State Farm demurred to the 
complaint, asserting that Village Northridge ―could not affirm the settlement agreement 
and simultaneously assert claims that were explicitly released in it.‖  The trial court 
sustained the demurrer without leave to amend.  The court observed that Village 
Northridge sought to affirm the settlement agreement and keep the money paid in the 
settlement without releasing its additional claims, and that it ―can‘t have it both ways.‖  
 
Village Northridge appealed, and the Court of Appeal again reversed the trial 
court judgment.  The court distinguished the case from Garcia v. California Truck Co. 
(1920) 183 Cal. 767 (Garcia) and Taylor v. Hopper (1929) 207 Cal. 102 (Taylor), which 
hold that a plaintiff cannot avoid an allegedly fraudulently induced contract of release 
unless it rescinds the contract and restores the money it received as consideration.  The 
court limited application of both cases to the personal injury context, concluding that 
neither applies in the insurance or contract contexts.  
 
As we explain in greater detail below, the rules governing rescission of settlement 
release agreements require the parties to follow the statutory and common law rescission 
procedures before suing for damages. 
                                              
4  
In its answer brief, Village Northridge claims that sections 1667 and 1668 apply.  
These sections generally govern contracts that are fraudulent and contrary to public policy; 
however, as the trial court observed, such contracts are not at issue in this case. 
6 
DISCUSSION 
― ‗On review of the judgment of the Court of Appeal reversing the superior court‘s 
orders sustaining defendants‘ demurrers, we examine the complaint de novo to determine 
whether it alleges facts sufficient to state a cause of action under any legal theory, such 
facts being assumed true for this purpose.‘ ‖  (Betancourt v. Storke Housing Investors 
(2003) 31 Cal.4th 1157, 1162-1163, quoting McCall v. PacifiCare of Cal., Inc. (2001) 25 
Cal.4th 412, 415.)  We begin with a discussion of the rules governing contracts and their 
release and rescission. 
A.  Rules for Rescission 
As noted above, Village Northridge alleges State Farm committed fraud in the 
inducement in the settlement and release process by misrepresenting policy limits.   
The general contract rules that govern this case are as follows:  If a party believes 
it has been fraudulently induced to enter into a contract, ― ‗ ―[i]n order to escape from its 
obligations the aggrieved party must rescind . . . .‖ ‘ ‖  (Rosenthal v. Great Western Fin. 
Securities Corp. (1996) 14 Cal.4th 394, 415, italics omitted.)  The party‘s rescission 
obligations depend on the type of fraud alleged.  Our state distinguishes between fraud in 
the execution or inception of a contract, and fraud in the inducement of a contract.  (Ibid.)  
If the fraud goes to the execution or inception of the contract, so that the promisors do not 
know what they are signing, the contract lacks mutual assent and is void.  It thus ― ‗ ―may 
be disregarded without the necessity of rescission.‖ ‘ ‖  (Ibid.)  ― ‗In the usual case of 
fraud, where the promisor knows what he is signing but his consent is induced by fraud, 
mutual assent is present and a contract is formed, which, by reason of the fraud, is 
voidable . . . .‘ ‖  In that case, the party seeking to void the contract must rescind under 
our statutory and common law rules.  (Ford v. Shearson Lehman American Express, Inc. 
(1986) 180 Cal.App.3d 1011, 1028, italics omitted.)  Rescission requires that the 
aggrieved party provide the other party to the agreement with ― ‗prompt notice‘ ‖ and an 
― ‗offer to restore the consideration received, if any.‘ ‖  (Ibid.)  
7 
The principal rule regarding rescission of a release contract that may have been 
induced by fraud dates back to the late 19th and early 20th centuries.  The rule was first 
stated in section 1691 (enacted in 1872), and it is now embodied in the holdings of 
Garcia, supra, 183 Cal. 767, and Taylor, supra, 207 Cal. 102.  As noted in footnote 1, 
ante, section 1691 requires the party seeking rescission to give notice to the other party 
―as to whom he rescinds,‖ and to restore all consideration or ―everything of value which 
he has received‖ under the contract.  The statute‘s language is clear.  With certain 
exceptions discussed below, it generally requires that the rescinding party return any 
consideration received as a condition of rescission before judgment in the rescission 
action.  As originally enacted, section 1691 did not make pre-lawsuit restoration an 
absolute condition of rescission, but instead required ―the use of . . . reasonable 
diligence‖ to restore or offer to restore any consideration received.  We thereafter 
recognized various specific equitable exceptions, including when, ―without any fault of 
plaintiff, there have been peculiar complications which make it impossible for plaintiff to 
offer full restoration . . . .‖  (Kelley v. Owens (1897) 120 Cal. 502, 511.) 
In Garcia, supra, 183 Cal. 767, a trucking company‘s horse struck plaintiff, 
injuring him.  After receiving a monetary settlement and signing a release as to all causes 
of action, the plaintiff claimed that the settlement was obtained through fraud and that he 
wished to pursue damages.  (Id. at p. 768.)  Garcia observed that the question on appeal 
was the effect to be given the release contract, ―which, of course, unless avoided in some 
legitimate way, constitutes an insuperable bar to recovery in this action for damages for 
injuries caused by the negligence of defendant.  At no time prior to the commencement of 
the action did plaintiff attempt to rescind this contract of release, and his complaint in this 
action for damage for the original tort was altogether silent regarding it.  At no time has 
he restored or offered to restore to defendant any part of the consideration paid by 
defendant therefor, or attempted to show any reason why he should not be compelled to 
do this as a condition precedent to rescission.‖  (Id. at p. 769.)  The court held that the 
plaintiff could not avoid the release‘s terms unless he first rescinded the arguably 
8 
voidable contract and restored the consideration he received in return for the settlement 
and release.  Finding section 1691 ―explicit on the subject of rescission‖ (Garcia, at p. 
769), Garcia observed that the statute requires that, on deciding to rescind a contract, the 
plaintiff must ―use reasonable diligence to comply with certain specified rules,‖ one of 
which is that he ―[r]estore to the other party everything of value which he has received 
from him under the contract or offer to restore the same . . . . ‖  (§ 1691, subd. (b).)  This 
action places the parties in the positions they occupied prior to the agreement.  The court 
specifically stated that it was ―aware of no good reason why [section 1691] is not as fully 
applicable to a contract of release of claim for damages for personal injuries as to any 
other contract.‖  (Garcia, supra,183 Cal. at pp. 769-770.)  As noted, the plaintiff had not 
tried to show reasonable diligence to comply with the restoration requirement. 
Nine years later, this court decided Taylor, in which the plaintiff alleged the 
defendants negligently ran over her with their automobile.  (Taylor, supra, 207 Cal. at p. 
102.)  The parties reached a compromise settlement, but the plaintiff subsequently 
claimed the settlement was fraudulently induced.  (Id. at pp. 102-103.)  In order to avoid 
the application of Garcia and section 1691, the plaintiff claimed she did not seek to 
rescind the compromise agreement, but rather wished to affirm it, to retain the money she 
received from it, and then to sue for fraud damages — as Village Northridge seeks to do 
here.  (Id. at p. 103.)  Taylor followed Garcia‘s reasoning, and, in quoting that case, held 
that ― ‗[w]here the claim is for unliquidated damages or where the settlement is made to 
adjust a matter in dispute, or where there is a controversy as to the amount owing, and the 
parties agree upon a sum that shall be paid in settlement, the amount so paid shall be 
returned if the party settled with seeks to avoid the settlement on the ground of fraud.‘ ‖  
(Taylor, supra, 207 Cal. at p. 105, quoting Garcia, supra, 183 Cal. at p. 772.)  In sum, the 
plaintiff could not avoid the obligation to return the consideration by ―affirm[ing]‖ the 
settlement agreement and seeking damages for fraud.  (Taylor, supra, 207 Cal. at p. 103.) 
Two decades later, this Court held in Carruth v. Fritch (1950) 36 Cal.2d 426, 430–
431 (Carruth), that Garcia and Taylor did not bar a rescission claim by a plaintiff who—
9 
unlike the plaintiff in Garcia—acknowledged the restoration requirement, but alleged 
that she could not satisfy that requirement because, after defendants had paid her for her 
release, she had spent the money on medical expenses.  (Ibid.)  Because Village 
Northridge has disclaimed any interest in seeking rescission, Carruth is not applicable in 
this case.  In Part C below, we discuss both Carruth and Civil Code section 1693, a 1961 
amendment to the rescission statutes that codified much of Carruth‘s rule. 
B.  Applying Taylor and Garcia 
According to the Court of Appeal, two general principles are involved in this case:  
the ―Garcia principle‖ that a personal injury plaintiff cannot avoid a fraudulently induced 
release without rescinding it and restoring the consideration received, and the ―more 
general‖ principle that a party who is fraudulently induced to execute a contract can 
either rescind the contract and restore the consideration, or can affirm the contract and 
recover damages for fraud.  The Court of Appeal limited application of Garcia and 
Taylor to personal injury cases, and applied the more general rule for fraud actions that 
do not involve the rescission of a contract or release agreement.  As we explain, the court 
concluded that Village Northridge may avoid the release in its settlement agreement, 
keep the settlement proceeds, and sue for fraud by affirming the agreement that it wishes 
in large part to invalidate.  
The Court of Appeal relied on two California cases that applied this affirm-and-
sue principle.  The court initially cites Denevi v. LGCC, LLC (2004) 121 Cal.App.4th 
1211, 1220 (Denevi) for the proposition that a victim of fraud has the right to ― ‗affirm 
the contract, and simply sue for damages for the fraud.‘ ‖  (Italics omitted.)  In Denevi, 
the plaintiff held a contractual right to purchase a parcel of real property for $8 million.  
(Id. at p. 1215.)  The plaintiff entered into an agreement with several investors to form a 
venture to purchase the property.  Following a disagreement between the parties over the 
escrow account, the property owner sold the property to another party.  (Ibid.)  The 
plaintiff later filed both a derivative action against the seller on the venture group‘s behalf 
10 
and a personal claim against his fellow investors in the venture group for, inter alia, fraud 
in failing to provide adequate funding to purchase the property.  (Id. at p. 1216.)   
In ruling on the personal fraud claim, the Court of Appeal observed that the 
plaintiff never elected to rescind the original venture contract and that, in any event, 
rescission ―became impossible when the property reverted to the owner, who transferred 
it to a complete stranger.‖  (Denevi, supra, 121 Cal.App.4th at p. 1221.)  In short, the 
court recognized that it had no power to order return of the property to the plaintiff and 
that rescission was therefore impossible.  (Ibid.)  The court stated that the plaintiff, as an 
alleged fraud victim, may not be required to undo the transaction in its entirety when the 
fraud occurred at the moment the venture group‘s management induced the plaintiff to 
part with his purchase rights, i.e., at the inception or formation of the contract.  (Id. at p. 
1219.)  The court reasoned:  ―[The plaintiff] has the right to ‗retain the benefits of the 
contract . . . , and make up in damages the loss suffered by the fraud. . . .  [H]e may 
affirm the contract, and simply sue for damages for the fraud.‘ ‖  (Denevi, supra, at p. 
1220, quoting 5 Witkin, Summary of Cal. Law (9th ed. 1990) Torts, § 725, p. 825, italics 
added by the Denevi court.) 
Denevi does not apply here because it assumes the existence of a contract fully 
executed by both sides and affirmed in its entirety, followed by a suit for fraud.  (Denevi, 
supra, 121 Cal.App.4th at pp. 1220-1221.)  That case did not involve a settlement and 
release of all disputed claims, and a release was not the object of any agreement between 
the parties.  In Denevi, because there was no settlement and release of all claims, there 
was simply no indication that the plaintiff  ―ever invoked any of the procedures generally 
reflecting a rescission.‖  (Id. at p. 1220.)  In sum, in contrast to the Denevi facts, the 
purpose of the settlement and release in this case was to ―buy[] peace,‖ i.e., freedom from 
the threat of suit in a case in which the damage amounts were disputed.  The Court of 
Appeal reasoned that State Farm was not simply ―buying peace,‖ as in the release of a 
personal injury claim, but was also satisfying an underlying contractual obligation.  
Whether or not defendant‘s sole objective in this settlement was to buy peace, that end 
11 
was part of the consideration defendant expected to receive as a result of the settlement 
and release between the parties.  Indeed, the Court of Appeal acknowledges this is so.  
Therefore, plaintiff does not seek to affirm the release in its entirety, nor can it assert with 
any merit that it does so. 
The Court of Appeal next relied on Sime v. Malouf (1949) 95 Cal.App.2d 82 
(Sime), which involved a sophisticated corporate conspiracy and complicated factual and 
procedural situation.  Sime analyzed a release that was included in a sales agreement 
under which the defendants acquired the plaintiff‘s interest in a project.  (Id. at pp. 108-
109.)  In contrast to the release signed by Village Northridge and State Farm, the release 
at issue in Sime was a general release that did not include unknown claims (id. at p. 110; 
see § 1542), and no monetary consideration was paid for the release.  (Sime, supra, 95 
Cal.App.2d at pp. 109-110.)  Sime stated that restoration was not necessary where the 
plaintiff had a right, ―independently of the release itself,‖ to retain the money.  (Id. at p. 
111.)  Sime clearly articulated the difference between cases involving fraud in a release 
over a disputed amount and fraud in inducing one to buy something:  ―In such cases 
[Garcia and Taylor] it is clear that the plaintiff must restore what he has received in 
settlement of the disputed claim before suing upon it.  He cannot retain the benefits of the 
release and sue, for to sue would violate the terms of his bargain.  To hold otherwise 
would frustrate the very purpose of the release and destroy its effectiveness as a favored 
device for eliminating litigation.  Hence rescission is necessary[,] and may be effectively 
accomplished only by returning the entire consideration received, for if plaintiff should 
fail to establish his cause of action, he would not be entitled to retain anything.  The rule 
in such circumstances appears to be well settled.‖  (Id. at pp. 110-111.)  
The Sime court also recognized that ―[e]qually well established, however, is the 
exception to the rule:  A restoration is not necessary, in order to avoid the bar of a release, 
where there is no question as to the right of the plaintiff, arising independently of the 
release itself, to retain what he received.  [Citations.]‖  (Sime, supra, 95 Cal.App.2d at p. 
111; see id. at pp. 111-112, construing Montes v. Peck (1931) 112 Cal.App. 333, 341, and 
12 
cases involving fraud in the sale of property.)  Other cases are in agreement.  (See, e.g.,  
Stefanac v. Cranbrook Educ. Community (Mich. 1990) 458 N.W.2d 56, 60 [―A 
compromise and release is not to be confused with the law of contract, in which 
equivalents are exchanged, for the very essence of a release is to avoid litigation, even at 
the expense of strict right.‖].)  
Here, the additional $1.5 million State Farm paid to Village Northridge in 
exchange for the settlement and release of all claims is not wholly ―independent[] of the 
release itself.‖  (See Sime, supra, 95 Cal.App.2d at p. 111.)  The release was not included 
in a contract that had another purpose:  it was the sole purpose of the settlement.  Indeed, 
the underlying claim was the subject of dispute.  State Farm maintained that not all of the 
damage was earthquake related and that the amount of the benefits owed was less than 
the claim.  The settlement was intended to resolve that dispute, and the release was 
intended to apply to it. 
In a related argument, which the Court of Appeal accepted, Village Northridge 
relies on Bagdasarian v. Gragnon (1948) 31 Cal.2d 744, 750, for the rule that a party has 
the option of affirming the settlement agreement and recovering fraud damages. 
However, this rule requires the affirming party ― ‗on his part [to] comply with the terms 
of the contract . . . . ‘ ‖  (Ibid., quoting Schmidt v. Mesmer (1897) 116 Cal. 267, 270-271.)  
Here, Village Northridge seeks to affirm those parts of the agreement that benefit it, but 
to invalidate a major part of the agreement that benefits State Farm.  Therefore, the ―more 
general principle‖ in Bagdasarian does not apply.  
As State Farm observes, Persson v. Smart Inventions, Inc. (2005) 125 Cal.App.4th 
1141, on which Village Northridge and the Court of Appeal also rely, is easily 
distinguished.  The dispute in Persson was over the price the defendant had to pay to 
purchase the plaintiff‘s stock certificates.  (Id. at pp. 1149-1150.)  The court relied on its 
equitable power to set aside the contract, which it believed was procured by fraud.  (Id. at 
p. 1156.)  In Persson, the plaintiff was allowed to affirm a settlement agreement, keep the 
settlement money, and sue for damages based on fraud.  (Id. at pp. 1152-1156.)  Persson, 
13 
however, was a case, like Sime, supra, 95 Cal.App.2d 82, in which the plaintiff was 
entitled to a portion of the money he received independent of the settlement.  Village 
Northridge relies on Persson to claim that, because State Farm had an underlying 
contractual obligation not to misrepresent the terms of its policy, Village Northridge was 
entitled to payment for insured losses independent of the release it signed.  As State Farm 
observes, however, in contrast to the parties in Persson, the parties here were settling a 
disputed claim, as the settlement agreement specifically recited.  Indeed, even Persson 
recognized that Garcia controls whenever the release ―was the sole object of the contract, 
for which the consideration was paid.‖  (Id. at p. 1156.) 
C.  Policy Considerations 
The Court of Appeal supported its conclusion that Garcia, supra, 183 Cal. 767, 
and Taylor, supra, 207 Cal. 102, do not apply to insurance settlements by reference to 
policy considerations articulated in a limited number of cases from other jurisdictions that 
apply common law principles in the absence of an operative statute similar to section 
1691.  (See, e.g., Matsuura v. Alston & Bird (9th Cir. 1999) 166 F.3d 1006, 1008, fn. 4, 
mod. 179 F.3d 1131 [applying Del. election of remedies law to a claim that settlement of 
products liability suits for property damage was fraudulently induced]; DiSabatino v. U.S. 
Fidelity & Guar. Co. (D.Del. 1986) 635 F.Supp. 350, 352-353 [granting tort plaintiff 
election of remedies to stand on fraudulently induced release and proceed on fraud cause 
of action]; Phipps v. Winneshiek County (Iowa 1999) 593 N.W.2d 143, 146 [―election of 
remedies doctrine should generally be available to a defrauded party to a settlement 
agreement . . .‖]; see also Kordis v. Auto Owners Ins. Co. (Mich. 1945) 18 N.W.2d 811, 
813 [no restitution or rescission necessary as a condition precedent to maintaining action 
for damages arising from false representation and deceit].)  The above-cited cases are 
inapposite, for they simply reject the Garcia and Taylor rescission rule and hold that, 
even in a personal injury case, a defrauded party may elect rescission or an independent 
action for damages.   
14 
More significantly, the California Legislature had the opportunity to overrule 
Garcia and Taylor when it amended section 1691 in 1961.  It chose not to do so.  As 
State Farm observes, the legislative history behind the 1961 amendments to the rescission 
statutes supports the continuing viability of Garcia and Taylor.  Indeed, during its 
evaluation of the proposed amendments, the California Law Revision Commission 
(Commission) considered whether the rescission and restoration of consideration 
requirement was sound.  (See Recommendation on Rescission of Contracts, supra, at pp. 
D-8 to D-14.)  One proposal would have allowed the trial court first to determine the 
validity of the release.  The proposed statute would have stated that if the settlement 
contract was found invalid, the consideration paid to the plaintiff would be set off against 
any judgment in the fraud action.  (Recommendation on Rescission of Contracts, supra, 
at pp. D-8, D-29 [discussing a proposed, but not enacted, Code Civ. Proc. provision].)   
The Commission was aware that some of the parties seeking to sue for fraud in the 
inducement might have spent the money received in the original settlement to mitigate 
their damages, making restoration nearly impossible in these cases.  One case the 
Commission discussed was Carruth, supra, 36 Cal.2d 426, in which the court addressed 
the equitable concerns that eventually formed the basis for section 1693‘s relaxation of 
the timing for the restoration of consideration mandated by section 1691.  In Carruth, the 
plaintiff suffered injuries in an automobile accident and sued the defendant owner of the 
automobile in which she was injured for damages.  Under ―pressure of financial need‖ 
the plaintiff eventually executed a settlement and release of her right to recover any 
damages in exchange for $2,000.  She later asked the court to set aside the release and 
award damages to her, asserting that the defendants never intended to honor their 
promises to pay for her future medical expenses and lost income.  She included in her 
complaint a second cause of action for fraud in inducing her to sign the release.  The 
defendants claimed that because the plaintiff did not return the $2,000 received in the 
settlement, she could not pursue her rescission claim, because restoration of the 
15 
consideration for the release was a necessary prerequisite to maintaining the rescission 
action.  (Carruth, at pp. 429-430.)   
The court allowed the rescission lawsuit to proceed, concluding that the rule 
requiring ―tender or return of consideration. . . . is not inflexible.‖  (Carruth, supra, 36 
Cal. 2d at p. 430.)  The court observed that because the defendants knew that the plaintiff 
―would be obliged immediately to pay out the consideration for medical expenses 
incurred by reason of the alleged tort,‖ and knew that she then would not be able to 
restore the original consideration received for her injuries, there would be ―no legal 
reason for requiring her to restore the consideration‖ she received.  (Id. at p. 431.)  
Relying on several earlier cases, the court held that ―[h]aving known that the entire 
amount was to be applied to payment of medical expenses and she was without means to 
repay it, neither the [defendants] nor their insurer is prejudiced by her failure to do so.‖  
(Ibid.)   
The Legislature was aware of Carruth as it sought to promote a flexible approach 
toward the restoration requirement.  Although the Legislature did not specifically adopt 
Carruth‘s holding, it also clearly did not intend to repeal the case.  (Recommendation on 
Rescission of Contracts, supra, at pp. D-34 to D-35.)  Therefore, consistent with the rule 
against implied repeals, we find that Carruth v. Fritch, supra, 36 Cal.2d 426 remains 
good law, subject to certain modifications embodied in section 1693, as noted below.  
(See e.g., Brodie v. Workers’ Comp. Appeals Bd. (2007) 40 Cal.4th 1313, 1325.)   
The Legislature eventually adopted the Commission‘s proposal for a new statute 
to address any unfairness that the rescinding parties might face if they were insolvent or 
without the funds to restore consideration prior to filing suit.  The statute, section 1693, 
as adopted in 1961, states that ―[a] party who has received benefits by reason of a 
contract that is subject to rescission and who in an action or proceeding seeks relief based 
upon rescission shall not be denied relief because of a delay in restoring or in tendering 
restoration of such benefits before judgment unless such delay has been substantially 
prejudicial to the other party; but the court may make a ‗tender of restoration a condition 
16 
of its judgment.‘ ‖ 5  (§ 1693; Carruth, supra, 36 Cal.2d at p. 430; see also Paularena v. 
Superior Court (1965) 231 Cal.App.2d 906, 913 [imputing an offer of restoration from 
the filing of an action alleging both rescission and fraud].)6  Thus, although the 
Legislature specifically rejected the ―affirm and sue‖ principle adopted by several states, 
it also, through section 1693, permitted plaintiffs who are unable to restore the 
consideration received in their original settlements and releases to delay the restoration of 
consideration until final judgment consistent with equitable principles, including that 
defendants not be substantially prejudiced by the delay.  Had Village Northridge sued for 
rescission of its release under the statutory scheme governing rescission, it may have had 
the opportunity to delay restoration of the consideration it received in settling the 
property damage matter.  State Farm agreed in supplemental briefing and at oral 
argument that section 1693 may have allowed the trial court to postpone any restoration 
requirement until judgment in the case.  Instead, Village Northridge proceeded under an 
―affirm and sue‖ trial strategy that is barred in this state under section 1691 and existing 
precedent.  (Taylor, supra, 207 Cal. at p. 105; Garcia, supra, 183 Cal. at p. 773.)   
                                              
5  
Section 1693 narrowed the Carruth exception in one respect:  where in Carruth 
we permitted the plaintiff to proceed without any assurances to defendant, section 1693 
now authorizes a court to make restoration of the original consideration a condition of 
any judgment.  But it also expanded upon Carruth in another respect:  the justification for 
postponing restoration is no longer confined to circumstances where a defendant has 
engaged in the sort of intentional manipulation alleged in Carruth, as the focus has now 
been shifted to an inquiry into whether there has been substantial prejudice to a 
defendant. 
6 
One case has taken a restrictive view of section 1693, concluding that plaintiff‘s 
delay in restoring consideration alone is sufficient to demonstrate prejudice to defendant.  
(Myerchin v. Family Benefits, Inc. (2008) 162 Cal.App. 4th 1526, 1535 [failure to restore 
settlement payment and sue for fraud prejudicial as a matter of law because defendant 
―would lose the sole benefit it had contracted for in the settlement‖ (italics omitted)].)  
We disapprove Myerchin to the extent it ignores section 1693‘s express grant of authority 
to courts to exercise their discretion in delaying restoration until judgment. 
 
17 
D.  Insurer’s Alleged Quasi-fiduciary Duty to the Insured 
Village Northridge asserts that, as between insurer and insured, a quasi-fiduciary 
relationship exists as a matter of law.  (Love v. Fire Ins. Exchange (1990) 221 Cal.App.3d 
1136, 1147.)  It asks us to factor that relationship into our decision here.  State Farm is in 
a legally recognized special relationship with plaintiff, and it has duties that clearly 
encompass forthright and affirmative disclosure of available policy limits.  However, 
―[a]n insurer is not a fiduciary, and owes no obligation to consider the interests of its 
insured above its own.‖  (Morris v. Paul Revere Life Ins. Co. (2003) 109 Cal.App.4th 
966, 973.) 
As noted above, we see no need to impose a new rule that might or might not 
further the insured-insurer relationship.  State Farm does not claim that a release exempts 
it from a potential fraud claim.  Instead, it asserts only that if Village Northridge brings 
suit based on alleged fraud after entering into a valid settlement and release, it must 
comply with our rescission statutes, sections 1688 to 1693.  In addition, the Legislature 
subjects the insurance industry to strict and enforceable standards of conduct through 
laws against misrepresenting insurance policy limits and fraud in the inducement.  (See, 
e.g., Ins. Code, § 790.03 et seq.)   
E.  The Law Favoring Settlement 
―The law favors settlements.‖  (Bush v. Superior Court (1992) 10 Cal.App.4th 
1374, 1382.)  State Farm contends that if an insured can settle a disputed claim, keep the 
money paid, and then sue anyway without complying with our rescission statutes, no 
insurer would ever settle a disputed claim.  Village Northridge asserts that a decision 
against it would hinder settlement, because the courts would be ―tolerating 
misrepresentation of policy limits by precluding any remedy for the crime in instances 
where a release is involved.‖  Village Northridge asks, ―How is the policy favoring 
settlement furthered by refusing a remedy at law to victims of fraud in connection with a 
fraudulently induced settlement?‖  The answer is simple.  The court is not refusing a legal 
remedy to victims of fraud, because they still have the option of rescinding the contract 
18 
and then suing for damages.  Village Northridge further contends that if the settlement 
process is to be viable, insureds must have a legal remedy for misrepresentation of policy 
limits.  Rescission under sections 1688 to 1693 is such a remedy. 
In addition, the Court of Appeal stated that ―[t]he consequences of applying this 
principle [of allowing plaintiff to settle, keep the money paid, and then sue for fraud] are 
not dire,‖ and so they will not deter settlement.  In essence, the court reasons that the 
insurer needs only to avoid misrepresenting policy limits.  The Court of Appeal 
―seriously doubt[s] insureds who settle their claims can be expected thereafter to assert 
groundless claims of misrepresentation of policy limits on a routine basis.‖  Although we 
agree the consequences may not be ―dire,‖ especially if the holding is specifically limited 
to allowing a suit for fraudulent inducement by misrepresenting policy limits rather than 
applying to fraudulent inducement in general, this contention is beside the point.  Such a 
claim, by itself, cannot justify the break from settled law that the Court of Appeal‘s 
holding would represent.  The fact that the consequences may not be dire does not mean 
they will be desirable.  A settlement agreement is considered presumptively valid, and 
plaintiffs are bound by an agreement until they actually rescind it.  We cannot ignore the 
equities of contract law simply because the Court of Appeal deems its holding to be a 
narrow one that applies only to those few cases where a plaintiff alleges that its insurer 
misrepresented policy limits when settling a claim.  We find that the established rule is 
more likely to favor settlements, particularly when the parties have the equitable 
safeguards available to them under section 1693 discussed above. 
CONCLUSION 
To allow Village Northridge to settle with State Farm and sign a release, keep the 
money, and then sue its insurer for alleged fraud without rescinding the release under our 
statutory scheme (§§ 1688-1693) would violate the terms of the bargain and frustrate its 
purpose.  It would also likely inhibit insurance companies‘ practice of using a release as a 
settlement device.  The Court of Appeal justified its decision based on policy 
considerations enumerated in out-of-state and federal cases allowing affirmation and suit.  
19 
However, California does not follow those cases, and Garcia, supra,183 Cal. 767, and 
Taylor, supra, 207 Cal. 102, are controlling precedent in this situation.  We see no reason 
to turn to other courts‘ decisions when our own statutory scheme is clear.  The 
Legislature has created a fair and equitable remedy to address the alleged fraud problem:  
rescission of the release, followed by suit.  When restoration is impossible because the 
settlement monies have been spent, the financially constrained parties can turn to section 
1693 to delay restoration until judgment, unless the defendants can show substantial 
prejudice.  Our statutory scheme therefore effectively ensures that plaintiffs who may 
have been defrauded in the settlement process will be allowed access to the courts.  For 
the reasons stated, we reverse the Court of Appeal‘s judgment and remand the matter for 
reconsideration in light of the reasoning set forth above. 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
CHIN, J. 
 
WE CONCUR: 
 
GEORGE, C.J. 
KENNARD, J. 
BAXTER, J. 
WERDEGAR, J. 
MORENO, J. 
CORRIGAN, J. 
 
 
 
See next page for addresses and telephone numbers for counsel who argued in Supreme Court. 
 
Name of Opinion Village Northridge Homeowners Assn. v. State Farm Fire and Casualty Co. 
__________________________________________________________________________________ 
 
Unpublished Opinion 
Original Appeal 
Original Proceeding 
Review Granted XXX 157 Cal.App.4th 1416 
Rehearing Granted 
 
__________________________________________________________________________________ 
 
Opinion No. S161008 
Date Filed: August 30, 2010 
__________________________________________________________________________________ 
 
Court: Superior 
County: Los Angeles 
Judge: Wendell Mortimer, Jr. 
 
__________________________________________________________________________________ 
 
Attorneys for Appellant: 
 
Engstrom, Lipscomb & Lack, Jerry A. Ramsey, Brian J. Heffernan and Alexandra J. Thompson for Plaintiff and 
Appellant. 
 
Sharon J. Arkin for United Policyholders as Amicus Curiae on behalf of Plaintiff and Appellant. 
 
 
__________________________________________________________________________________ 
 
Attorneys for Respondent: 
 
Robie & Matthai, James R. Robie, Kyle Kveton, Steven S. Fleischman; LHB Pacific Law Partners, Clarke B. 
Holland, Sandra E. Stone; Crandall, Wade & Lowe and Michael J. McGuire for Defendant and Respondent. 
 
Greines, Martin, Stein & Richland, Robert A. Olson and Alana H. Rotter for Association of Southern California 
Defense Counsel as Amicus Curiae on behalf of Defendant and Respondent. 
 
Fred J. Hiestand for The Civil Justice Association of California as Amicus Curiae on behalf of Defendant and 
Respondent. 
 
Chapman, Popik & White, Susan M. Popik and Carol D. Quackenbos for Personal Insurance Federation of 
California as Amicus Curiae on behalf of Defendant and Respondent. 
 
 
 
 
 
 
 
Counsel who argued in Supreme Court (not intended for publication with opinion): 
 
Brian J. Heffernan 
Engstrom, Lipscomb & Lack 
10100 Santa Monica Boulevard, 16th Floor 
Los Angeles, CA  90067-4107 
(310) 552-3800 
 
Clarke B. Holland 
LHB Pacific Law Partners, LLP 
5858 Horton Street, Suite 370 
Emeryville, CA  94608 
(510) 841-7777