Update Alert—Changes to California Civil Code Section 1542

Heraclitus once said: “there is nothing permanent except change.” The Greek philosopher’s theory recognizes life’s perpetual state of change. Jurisprudence is no different; and often in the throes of each precedent, amendment, and opinion is the hopeful notion that what is to come improves upon that which was. This year, the California legislature sought to clarify existing law by revising California Civil Code Section 1542. And while many of the changes seem innocuous, the effect of the changes on settlement agreements going forward remains to be seen.

Often, at the end of a litigated matter is a settlement; and no settlement is complete without all parties agreeing to terms inscribed in a bulletproof, unwavering, unalterable, ironclad, indestructible, impenetrable, “this-is-it-ya-know,” type of release in which the parties release all inalienable rights from the beginning of time through doomsday. The problem, however, is that since 1872, California has promulgated that a general release does not extend to any unknown claims at the time of the settlement (thanks to Section 1542). As such, a common practice in settlement releases is to provide for an express wavier of Section 1542 so that the released party can buy their peace. (3 MB Practice Guide: CA Pretrial Civil Procedure 37.55 (2019) Thus, in insurance defense, the true power of 1542 is derived from its negative application, in that a defendant can request that the plaintiff waive any unknown claims that they may have in the future.

Although the purpose of the amendment was to clarify existing law, the changes may broaden the scope of allowable claims under the statute. The amended version of Section 1542 is as follows:

A general release does not extend to claims which that the creditor or releasing party does not know or suspect to exist in his or her favor at the time of executing the release, which and that if known by him or her, must would have materially affected his or her settlement with the debtor or released party.

The amended version clarifies existing law by adding the terms “releasing party” and “released party” alongside “creditor” and “debtor.” This change is a welcome clarification to the statute, as it shows that the any express waiver Section 1542, extends to claims involving more than money damages. In fact, Section 1542 has now been applied to in the insurance releases, employment releases, lemon law, and personal injury.

The other significant difference is the change of the word “must” to “would.” Under the older version, Section 1542 only extended to unknown claims that, if known, must have materially affected the settlement release. The new version, however, appears to broaden the scope of allowable claims under the Statute. Whether this change is a distinction without a difference remains to be seen.

Whatever precedents the changes to Section 1542 bring, the important takeaway for the savvy insurance adjuster is to update your settlement agreements. Why? Because much like the person who fails to update to the latest version of iOS, failing to update your templates may leave you without access to all of the features the amended statute may provide. And often the first principle of contract interpretation applied by courts is to look at the plain language of the contract.

The ubiquitous cycle of, “out with the old, in with the new,” is the sine qua non of progress. Hidden within each innovation is the goal to make things better. We may not always know how change will affect us, but we can do the best with what we’ve got. So please, take a moment and update that template.