Nick McGuffin Civil Rights Lawsuit – Complaint & Press Release

Oregon Supreme Court Overrules Stubblefield Rule

Oregon Supreme Court Overrules Stubblefield Rule

The Oregon Supreme Court recently issued an opinion overruling long established case precedent known as the “Stubblefield Rule” in Stubblefield v. St. Paul Fire & Marine, 267 Or 397 (1973).  The ‘Stubblefield Rule’ states that a covenant not to execute in exchange for an assignment of rights, by itself, constitutes a release that extinguishes further liability of the insured, and therefore also extinguishes the rights of the insurer because the insured is no longer “legally obligated to pay” those sums.

In this construction defect case, Brownstone Homes Condo. Ass’n v. Brownstone Forest Heights, LLC, 358 Or. 223, 363 P.3d 467 (2015), a condominium association (the “Association”) sued a subcontractor (the “Contractor”) for negligence as a result of various defects in the construction of its condominium complex.  When the Contractor tendered the claim to its insurer (the “Insurer”), the Insurer refused to defend and indemnify, claiming its policy did not cover the damage the Association sought recovery.  The Contractor’s policy with the insurer provided coverage for “those sums that the insured becomes legally obligated to pay as damages because of ‘bodily injury’ or ‘property damage.’”  The Contractor and the Association entered into a stipulated judgment against the Contractor that included a covenant by the Association not execute the judgment against the Contractor and an assignment of the claims against the Insurer. The judgment was entered in the Circuit Court, and Association attempted to garnish the Insurer for the unpaid portion of the judgment pursuant to ORS 18.352.  The Insurer rejected the writ of garnishment, arguing the Association’s covenant not to execute against the Contractor released the Contractor from any legal obligation, effectively eliminating the Insurer’s obligation of coverage.  The Insurer moved for summary judgment on the issue, and the Circuit Court found Stubblefield controlled and granted the Insurer’s motion for summary judgment and the Court of Appeals affirmed.

On this appeal, the Association argued Stubblefield was distinguishable in that it did not apply to garnishment actions under ORS 18.352, was abrogated under ORS 31.825, and that Stubblefield was wrongly decided.  First, the Court held that Stubblefield is applicable to the present garnishment action under ORS 18.352.   The statute sets out only two requirements for recovery from a judgment debtor’s insurance policy: (1) that a judgment has been rendered against the judgment debtor for injury or damage to person or property; and (2) that the judgment debtor has a covered liability for any injury or damage to person or property.  The Court agreed with the Insurer’s argument that “the amount covered” is affected by the fact that the covenant not to execute eliminated the Contractor’s liability to the Association and, and under Stubblefield, eliminated any amount covered as well.  The Court noted that the Association, in bringing the garnishment action against the Insurer, stands in the shoes of the insured, the Contractor, and is subject to any defenses that the Insurer could assert against the Contractor, including the Insurer’s defense that Stubblefield applies to eliminate the Insurer’s obligation to pay.  In short, the Court found that the argument that Stubblefield is inapplicable in the garnishment proceeding under ORS 18.352 as not well taken.

Secondly, the Court held that the Stubblefield decision was not abrogated under ORS 31.825.  The Insurer argued that, by its terms, the statute applies only to a settlement by a “defendant in a tort action against whom a judgment has been rendered.” As argued by the Insurer, the tense of the emphasized phrase made it clear that the statute applies only to a particular sequence of events: First, a judgment is rendered, and then, once that has occurred, an assignment and covenant not to execute are given.  That was not what happened in this case.  Rather, the parties first negotiated the assignment and covenant and only later obtained a judgment.  After specifically analyzing the legislative history of this statute and its plain meaning, the Court agreed with the Insurer.

Finally, the Court found that the Stubblefield decision was, in fact, wrongfully decided.  The Court agreed with the Association’s argument that the Stubblefield decision failed to apply the usual framework for interpreting policies of insurance and failed to offer any reasoned explanation for its conclusion about the effects of the settlement agreement.  Specifically, the Stubblefield decision engaged in no examination of the wording of the policy, no consideration of its context, no determination whether the policy was ambiguous, and no discussion of what considerations weighed in favor of resolving any ambiguity one way or the other.  Additionally, the Court noted that the Stubblefield decision paid inadequate attention to the court’s own prior case law and that there is the doctrinal question whether a covenant not to execute constitutes a release that, of its own force, extinguishes any further liability. Ultimately, the Court found that the phrase “legally obligated to pay”—at least as it is commonly used in liability insurance policies—is ambiguous, thus triggering the well-worn rule that such ambiguities in insurance policies are to be construed against the insurer, therefore overturning the Stubblefield decision.

Maloney Lauersdorf Reiner has represented numerous clients throughout Oregon in cases concerning insurance coverage, extra-contractual claims, and anti-assignment clause issues.  Please contact us with any questions regarding this matter, or anything else you read on the Insurance Coverage Blog.

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