By Allen Eraut, Claude Bosworth and Kevin Clonts
Many jurisdictions allow for consent judgments and assignments. As a settlement strategy, a defendant insured would agree to a consent judgment in exchange for a release, and a covenant not to execute by the plaintiff. The defendant would also assign to the plaintiff the defendant’s rights against its insurer. For more than 40 years, Oregon was one of a minority of jurisdictions that did not allow for consent judgments and assignments. Oregon instead followed “the Stubblefield rule” (Stubblefield v. St. Paul Fire & Marine, 267 Or 397 (1973)), which required that a judgment be entered before a party could assign rights against that party’s insurer. The Stubblefield rule was designed to limit assignments to situations where an insurer refused to defend, and a judgment was entered against the insured after a decision on the merits. In that situation, the insured could assign its rights against its insurer to the plaintiff. But if a party tried to assign those rights before judgment was entered – as part of a settlement, for example – the Stubblefield rule prevented the plaintiff from collecting against the insurer. The Stubblefield court reasoned that if the insured settled and was released from liability as part of the agreement, the insured was no longer “legally obligated to pay” any damages to the plaintiff, precluding coverage. Essentially, the insurer was released along with the insured.
Last week, in Brownstone Homes Condo Assn. v. Brownstone Forest Hts., 358 Or 223 (2015), the Oregon Supreme Court overruled Stubblefield, opening the door for parties to settle and assign claims before any judgment is entered.
Brownstone was a construction defect case in which a condominium homeowners association sued a contractor for negligence. The contractor’s insurer refused to defend the contractor, so the contractor and the homeowners association entered into a settlement. The settlement included a stipulated judgment against the contractor, a covenant by the homeowners association not to execute that judgment, and an assignment to the homeowners association of the contractor’s claims against its insurer. When the homeowners association then initiated a garnishment action against the insurer, the trial court dismissed the action under Stubblefield. The covenant not to execute had released the contractor from any obligation to pay the homeowners association, which meant that the contractor – and by extension the insurer – was no longer “legally obligated to pay” any damages to the homeowners association. The homeowners association appealed, arguing that Stubblefield either was distinguishable on its facts or was superseded by statute. In the alternative, it argued that Stubblefield was wrongly decided and should be overruled.
The Court of Appeals affirmed, but the Supreme Court reversed. The Supreme Court rejected the homeowners association’s first two arguments, finding that Stubblefield was not distinguishable, and was not superseded by statute. But the court agreed that Stubblefield was wrongly decided, and overruled it. The court found Stubblefield’s analysis “sparse” and contrary to prior precedent on the issue of whether the phrase “legally obligated to pay” allows an insurer to deny coverage when the insured enters into a stipulated judgment. Instead, the Brownstone court found the phrase “legally obligated to pay” ambiguous, triggering the rule that ambiguous terms must be construed against the insurer. The court also noted that the vast majority of other jurisdictions considering this issue have ruled that these stipulated judgments do not extinguish claims so as to preclude recovery from an insurer.
This decision brings Oregon in line with most jurisdictions that allow parties to settle and assign claims before entering into a stipulated judgment. We expect to see plaintiffs take advantage of this new rule and use consent judgments more often.
A link to the full opinion can be found here: http://www.publications.ojd.state.or.us/docs/S061273A.pdf