Oregon Supreme Court Overrules 42-Year-Old Precedent and Holds that Parties’ Settlement Did Not Release Insurer

The Oregon Supreme Court has overruled a 1973 decision and concluded that a covenant not to execute obtained in exchange for an assignment of rights did not, by itself, extinguish an insured’s or its insurer’s liability.

The Case

The Brownstone Homes Condominium Association alleged that it discovered various defects in the construction of its condominium complex.   It sued A&T Siding, Inc., one of the subcontractors on the project, for negligence.

A&T had purchased liability coverage from Capitol Specialty Insurance Co., to which it tendered its defense. Capitol concluded that its policy did not cover Brownstone’s claim, so it declined to defend or indemnify A&T.

Brownstone eventually settled with A&T. The settlement agreement provided for a $2 million stipulated judgment in favor of Brownstone and against A&T; an assignment to Brownstone of any claims A&T had against Capitol relating to Brownstone’s action against A&T; and a covenant by Brownstone that, “in no event [would] it execute upon or permit execution of the stipulated judgment against A&T or its assets,” but that it would seek recovery of the unexecuted portion of the judgment from Capitol.

Brownstone went to court, seeking to recover the unpaid portion of the judgment from Capitol.

Capitol moved for summary judgment, arguing that Brownstone’s covenant not to execute against A&T had released A&T from any legal obligation to pay Brownstone damages. Because the terms of its policy limited Capitol’s liability to “those sums that the insured becomes legally obligated to pay,” Capitol argued, the effect of the covenant not to execute was to eliminate its obligation of coverage.

The trial court granted Capitol’s motion for summary judgment, an intermediate appellate court affirmed, and the dispute reached the Oregon Supreme Court.

The Oregon Supreme Court’s Decision

The court reversed.

The court explained that under its 1973 decision in Stubblefield v. St. Paul Fire & Marine, a covenant not to execute against an insured judgment debtor released the judgment debtor from any legal obligation to pay damages to the judgment creditor as a matter of law, thereby eliminating any damages that the insurer was “legally obligated to pay” under the insurance policy.

Under Stubblefield, the court continued, Brownstone, in bringing its action against Capitol, stood in the shoes of the insured, A&T, and was subject to any defenses that Capitol could assert against A&T, including Capitol’s defense that Stubblefield applied to eliminate Capitol’s obligation to pay.

The court, however, then decided that Stubblefield had been wrongly decided and should be overruled.

The court pointed out that the majority view as adopted by courts in other jurisdictions was that when a covenant not to execute was given in the context of a settlement agreement for valuable consideration (specifically, an assignment of claims), it was a contractual promise not to sue the defendant on the judgment and not a release or extinguishment of the defendant’s legal obligation to pay it.

The court was mindful of the reasoning supporting the minority view – that a covenant not to execute had the practical effect of extinguishing liability to avoid the possibility of collusion between the entity seeking to recover from the insurance company and the insured. Nonetheless, it adopted the majority view and overruled Stubblefield. It found that the phrase “legally obligated to pay” – at least as commonly used in liability insurance policies – was “ambiguous” and that it had to be construed against the insurer in this case.

The court observed that it certainly was possible for parties to frame settlements in such a way as to make clear an intention that a covenant not to execute completely released the insured from liability. In this case, however, the court found no indication that the settlement agreement “unambiguously” evinced that intention. In fact, it pointed out, the terms of the settlement agreement spelled out the parties’ shared intent that Brownstone would be able to satisfy the judgment from A&T’s insurance assets because although it contained a release, it also expressly excepted from that release claims by Brownstone against Capitol.

It is worth noting that the court’s decision, in Brownstone Homes Condominium Ass’n v. Brownstone Forest Heights, LLC, No. SC S061273 (Ore. Nov. 19, 2015), came several weeks after it ruled, on a certified question from the Ninth Circuit, 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. See: Parties May Not Reform Settlement Agreement to Revive Claim.