On November 19, 2015, the Oregon Supreme Court overruled forty-year-old precedent holding that a plaintiff’s covenant not to execute a judgment obtained in a settlement with an insured-defendant extinguishes the insured-defendant’s liability to the plaintiff and, by extension, the liability of the defendant’s insurer, as well.
In Brownstone Homes Condo. Assn. v. Brownstone Forest Hts. et al, No. SC S061273255 (Or Nov 19, 2015), a homeowners association (“Association”) sued a siding subcontractor, A&T, for negligence and breach of contract. A&T had two insurers: Zurich and Capitol. Capitol initially undertook a defense of the action, but later declined to defend or indemnify A&T. The Association, A&T and Zurich settled the claim without Capitol’s participation. Under the settlement, A&T agreed to a stipulated judgment of $2 million, of which Zurich paid $900,000. The Association agreed not to execute on A&T’s assets, and A&T assigned its claims against Capitol to the Association. The settlement agreement was entered on March 14, 2008 and judgment was entered on November 13, 2008. Subsequent to entry of judgment, the Association filed a garnishment proceeding against Capitol seeking the $1.1 million balance. The trial court dismissed the garnishment action based on Stubblefield v. St. Paul Fire & Marine, 267 Or 397, 517 P2d 262 (1973), which held that a stipulated settlement, coupled with a covenant not to execute, extinguished liability. The Oregon Court of Appeals affirmed the trial court. On further review, the Oregon Supreme Court reversed. In doing so, the court expressly overruled Stubblefield:
In short, we conclude that Stubblefield erred when it concluded that a covenant not to execute obtained in exchange for an assignment of rights, by itself, effects a complete release that extinguishes an insured’s liability and, by extension, the insurer’s liability as well. It necessarily follows that the trial court in this case likewise erred in concluding that the existence of such a covenant not to execute as a component of the parties’ settlement agreement had the effect of extinguishing A&T’s liability to [the Association] and, as a result, had the effect of extinguishing Capitol’s liability as well.
Accordingly, under Oregon law, a covenant not to execute on a judgment obtained in exchange for an assignment of rights against the judgment debtor’s insurance carrier, does not, by itself, extinguish an insured’s liability and, thus, does not extinguish the insurance carrier’s obligation for the consent judgment. The court specifically limited its ruling to this narrow issue, declining to address, for example, whether collusion or fraud in the settlement may supply grounds for rejecting a stipulated or consent settlement.
Soha and Lang attorneys are available to assist insurer clients in understanding and addressing the impact of this decision both during the claims handling process and after an allegation of bad faith claims handling has been made.
Disclaimer: The opinions expressed in in this blog are those of the author and do not necessarily reflect those of Soha and Lang, P.S. or its clients.