Village Northridge Homeowners Ass'n v. State Farm and Cas. Co.

An insurer and its insured, a homeowners association, settled disputed claims arising from the Northridge earthquake, with the insurer paying $1.5 million and the insured releasing the insurer from all claims or causes of action it had or.may have arising out of its earthquake claim. Two years later, the association sued the insurer, and still later discovered the limits of its insurance policy were almost $7 million greater than had been represented by the insurer. The insurer insists that the association cannot pursue its claim unless it rescinds the settlement agreement and returns the $1.5 million, relying on Supreme Court precedents holding that a plaintiff cannot avoid a fraudulently induced contract of release without rescinding the contract and restoring the money paid as a consideration for the release. ( Garcia v. California Truck Co. (1920) 183 Cal. 767, 773 , 192 P. 708 ( Garcia ).) The association, which long ago used the $1.5 million to repair earthquake damage, insists it has the option of affirming the settlement agreement and recovering damages for the fraud. (See Bagdasarian v. Gragnon (1948) 31 Cal.2d 744, 750 , 192 P.2d 935 .)

We agree with the…