Brownstone Homes Condo. Assn. v. Brownstone Forest Hts.

Stubblefield v. St. Paul Fire & Marine was wrongly decided when it held 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.

In this construction defect case, Brownstone Homes Condominium Association (Brownstone) sued A&T Siding (Contractor) for negligence. When Contractor tendered the claim to Capitol Specialty Insurance Co. (Capitol), it refused to defend. Contractor’s policy with Capitol provided coverage for “those sums that the insured becomes legally obligated to pay as damages because of ‘bodily injury’ or ‘property damage.’” Contractor and Brownstone entered into a stipulated judgment against Contractor that included a covenant by Brownstone not execute the judgment against Contractor and an assignment of the claims against Capitol; the judgment was entered in the Circuit Court, and Brownstone attempted to garnish Capitol for the unpaid portion of the judgment pursuant to ORS 18.352. Capitol rejected the writ of garnishment, arguing Brownstone’s covenant not to execute against Contractor released Contractor from any legal obligation, effectively eliminating Capitol’s obligation of coverage. Capitol relied on Stubblefield v. St. Paul Fire & Marine, 267 Or 397 (1973). The Circuit Court found Stubblefield controlled and granted Capitol’s motion for summary judgment; the Court of Appeals affirmed. On this appeal, Brownstone argued Stubblefield was distinguishable in that it did not apply to garnishment actions under ORS 18.352, that it was abrogated under ORS 31.825, or that it was wrongly decided. The Court found that Stubblefield held a covenant not to execute against an insured judgment debtor releases the debtor from legal obligation to pay damages, therefore eliminating any damages the insurer is “legally obligated to pay,” and the holding is applicable to the present garnishment action. The Court also found the legislative history of ORS 31.825 shows the legislature intended the statute to allow insured defendants to assign “excess judgment” claims against their insurer where the excess judgment is in place before the assignment is given, and therefore does not abrogate Stubblefield in its entirety. The Court finally held that Stubblefield had been wrongly decided when it concluded, without proper analysis and attention to precedent, a covenant not to execute in exchange for an assignment of rights, by itself, constitutes a release that extinguishes further liability in the insured, and therefore the insurer. Reversed and remanded for further proceedings.