Parties May Not Reform Settlement Agreement to Revive Claim against Insurer, Oregon Supreme Court Decides

The Oregon Supreme Court, in response to a question certified to it by the U.S. Court of Appeals for the Ninth Circuit, has ruled that parties to a settlement agreement that contained an unconditional release of the insured could not amend the agreement to revive a claim against an insurer.

The Case

A homeowner’s association sued a builder in an Oregon state court for alleged construction defects. When the homeowner’s association and the builder settled, their settlement included an unconditional release and a covenant not to execute against the builder.

After the homeowner’s association attempted to garnish the builder’s liability insurance policy, the insurer claimed that it had no liability because the settlement had unconditionally released its insured from any liability. The state trial court agreed, and the builder appealed.

Meanwhile, in response to the state trial court’s conclusion that the settlement agreement had eliminated the insurer’s liability, the homeowner’s association and the builder amended their settlement agreement to eliminate the unconditional release and covenant not to execute. Then, pursuant to the new agreement, the builder initiated a lawsuit against its insurer, which the insurer removed to federal court.

In the federal court action, the insurer argued that the state court already had determined that, given the terms of the original settlement, the builder could not recover under its insurance policy. According to the insurer, the builder and homeowner’s association lacked authority to create any new insurance coverage obligation by amending their settlement agreement.

The builder and homeowner’s association argued that the original agreement contained a “mistake of law” in that the parties had “misapprehended” the legal effect of what they had agreed to. Specifically, they argued that they had not intended to execute an unconditional release and covenant not to execute that would relieve the builder and, ultimately, its insurance carrier, of any further liability. The negotiated reformation, they contended, rendered the original agreement void, so that any liability to which the builder agreed under the later, reformed agreement was not a new contractual liability but, instead, related back to the underlying litigation, which was covered by the insurance policy.

The federal district court agreed with the insurer, and the dispute reached the Ninth Circuit.

The circuit court asked the Oregon Supreme Court to determine whether the homeowner’s association and the builder could amend their settlement agreement in such a way as to revive the liability of the builder’s insurer.

The Oregon Supreme Court’s Decision

The Oregon Supreme Court ruled, in response to the Ninth Circuit’s certified question, that, although the builder and homeowner’s association possessed authority to amend the terms of their settlement agreement, they could not do so in a way that retroactively revived the liability that was eliminated in their original agreement, at least not on the basis of the reformation theory that they had proposed.

The court rejected the parties’ contention that reformation was available because their original agreement contained a mutual mistake of law, in the sense that they did not anticipate the legal consequences of the original settlement agreement as they had drafted it. Under Oregon law, the court explained, reformation was not available to parties to a contract for a mistake in law as to the legal effect of the contract.

Simply put, the court declared that there had been “no mistake in drafting, only a mistake in predicting how a court at some time in the future would rule on the legal effect of what the parties unquestionably agreed to.” That theory of reformation, therefore, did not justify treating the addendum as relating back to the original settlement agreement, the court concluded.

The case is A&T Siding, Inc. v. Capitol Specialty Ins. Corp., No. SC S062330 (Ore. Oct. 8, 2015).