The Oregon Court of Appeals recently held that an insurer/garnishee does not owe coverage to a plaintiff/garnishor when a settlement agreement that contains an unconditional covenant not to execute pre-dates a stipulated judgment.
On Feb. 27, the appellate court affirmed the trial court’s ruling in Brownstone Homes Condominium Association v. Brownstone Forest Heights, LLC and Capitol Specialty Insurance Co. The court noted that the plaintiff, as an assignee of insured A&T, was not entitled to garnish the insurance policy issued to A&T by Capitol under the rule set out in Stubblefield v. St. Paul Fire & Marine, 267 Or. 397, 517 P.2d 262 (1973).
In Brownstone Homes, the plaintiff condominium owners association filed a construction defect lawsuit against A&T for breach of contract and negligence. Zurich and Capitol insured A&T. The Capitol policy stated, in part, that it will pay “those sums that the insured becomes legally obligated to pay as damages because of . . . ‘property damage’ to which this insurance applies.”
The plaintiff, A&T and Zurich entered into a settlement agreement, in which A&T agreed to stipulate to a judgment against it in favor of the plaintiff for $2 million, of which Zurich agreed to pay $900,000 on behalf of A&T. The plaintiff agreed that “in no event will it execute . . . the stipulated judgment against A&T. . . .” A&T assigned its claims against Capitol to the plaintiff. A stipulated judgment and money award was entered, and the plaintiff commenced a garnishment action against Capitol pursuant to ORS 18.352, alleging that Capitol was liable for approximately $1.1 million, the unpaid portion of the stipulated judgment.
Capitol moved for summary judgment, arguing that under the Stubblefield rule, the settlement agreement extinguished Capitol’s potential liability because Zurich already had satisfied what A&T was “legally obligated to pay.” Capitol also argued that ORS 31.825, which permits a defendant to assign any cause of action the defendant has against an insurer after an entry of a judgment, does not apply because the assignment occurred before entry of the judgment.
The Stubblefield rule says that when the insurer agrees to pay a sum that the insured becomes “legally obligated to pay,” and the insured assigns its rights under the policy to the plaintiff, who agrees unconditionally not to execute the stipulated judgment against the insured, the plaintiff’s subsequent action against the insurer is precluded if the settlement agreement pre-dates the entry of the stipulated judgment. Because the unequivocal non-execution covenant renders the insured not “legally obligated to pay” the plaintiff, the insurer has no obligation to the insured, and plaintiff has no rights that are enforceable against the insurer.
The trial court granted summary judgment to Capitol and the plaintiff appealed. Last month, the Oregon Court of Appeals affirmed the trial court’s decision.
The Court of Appeals rejected the plaintiff’s argument that Stubblefield does not apply under ORS 18.352, which permits a judgment creditor to commence a garnishment action against the judgment debtor’s insurance. Citing State Farm Fire & Cas. v. Reuter, 299 Or. 155, 700 P.2d 236 (1985), the court noted that whether the plaintiff is a garnishor or a subrogee, the plaintiff’s rights against the insurer are no greater than those of the insured.
Capitol is only liable to A&T for those sums that A&T becomes legally obligated to pay. Under the Stubblefield rule, the settlement agreement extinguished Capitol’s potential liability because Zurich already had satisfied what A&T was legally obligated to pay. As a result, Capitol has no enforceable payment obligations to A&T and, in turn, to the plaintiff.
The plaintiff also argued that the Stubblefield rule is abrogated by ORS 31.825, which states that a defendant, “against whom a judgment has been rendered,” may assign any cause of action that the defendant has against the insurer” to the plaintiff “in whose favor the judgment has been entered.” However, the Oregon Court of Appeals held that by its plain meaning, ORS 31.825 applies only if the judgment was entered before the assignment of rights. The Court of Appeals noted that ORS 31.825 uses the present perfect verb tense – “defendant . . . against whom a judgment has been rendered may assign . . . to the plaintiff in whose favor the judgment has been entered.” The Court of Appeals opined that the “tense necessarily connotes that the judgment must be entered before the assignment of rights.”
In this case, the assignment in the settlement agreement predated the stipulated judgment; the judgment had not “been entered” at the time of the assignment. Because the order of events did not conform to the statutorily prescribed sequence, ORS 31.825 did not apply.
Finally, the plaintiff argued that the Stubblefield rule does not apply because the covenant not to execute was qualified as A&T agreed to cooperate with the plaintiff in pursuing the assigned rights and claims. However, the Court of Appeals disagreed and distinguished the case from Lancaster v. Royal Ins. Co. of America, 302 Or. 62, 726 P.2d 371 (1986). The Court of Appeals noted that while the non-execution agreement in Lancaster was qualified and ambiguous as the plaintiff agreed not to execute “personally” on a judgment against the defendant, the non-execution agreement in this case is unequivocal and unconditional as the plaintiff agreed that “in no event” will it execute on the judgment against A&T.
Click here for the opinion.
This opinion is not final. It may be withdrawn from publication, modified on rehearing, or review may be granted by the Oregon Supreme Court. These events would render the opinion unavailable for use as legal authority in Oregon state courts.