Oregon Supreme Court Finds That Covenants Not to Execute are Not Releases

Insuring clauses of many insurance policies obligate the insurance company to indemnify the insured for sums that the insured is “legally obligated to pay as damages …” Long ago, insurance company challenged covenants not to execute that were used as a part of consent settlement agreements against the insurer as not being covered because they released liability of the insured who was then no longer “legally obligated to pay” any part of the judgment damages. Over time, the overwhelming majority of courts that considered the issue came to the conclusion that covenants not to execute were not releases and therefore the insurance company was not excused on that basis alone from having to address the assignment and stipulated judgment that its insured entered into.

Forty-two years ago the Oregon Supreme Court found that covenants not to execute in the insurance context against insureds did constitute a release barring insurance coverage. In Stubblefield v. St. Paul Fire & Marine Ins. Co., 267 Or. 397, 517 P.2d 262 (1973), the Oregon Supreme Court held that a covenant not to execute against an insured judgment debtor released the judgment debtor from any legal obligation to pay damages to the judgment creditor as a matter of law, and, as a result, eliminated any damages that the insurance company was “legally obligated to pay” under its insurance policy. Stubblefield remained good law until just recently.

In Brownstone Homes Condominium Ass’n v. Brownstone Forest Heights, LLC, 358 Or. 223, 363 P.3d 467 (2015), the Oregon Supreme Court abruptly changed the law in Oregon regarding covenants not to execute and overruled Stubblefield. In doing so, the Court harshly criticized its prior decision. The Court stated that the Stubblefield Court’s reasoning was sparse to say the least. The entirety of the Court’s analysis of the meaning of the insurance policy involved the effect on the insurer’s liability was set forth in four sentences without reference to the Court’s usual approach to interpreting policies of insurance. The Court noted that the Stubblefield Court engaged in no examination of the wording of the policy, gave no consideration to the wording of the policy and context, made no determination of whether the policy was ambiguous, and set forth no discussion of what considerations weighed in favor of resolving any ambiguity that might be present in the policy one way or the other. The Court also found that the Stubblefield Court had paid inadequate attention to the Court’s own prior case law. Citing, as an example, Groce v. Fidelity General Ins., 252 Or. 296, 448 P.2d 554 (1968). Apart from its prior precedent, the Court ignored the doctrinal question of whether a covenant not to executed constituted a release that, of its own force, extinguished any further liability. Of significance to the Court in Brownstone was the fact that other jurisdictions that had considered the question had concluded, almost uniformly, that covenants not to execute were not releases.

The Oregon Supreme Court in Brownstone took some comfort in the fact that Stubblefield had not been relied upon extensively in Oregon case law and that the Stubblefield decision did not establish the sort of rule that later became the basis for structuring common commercial transactions.

The Oregon Supreme Court in Brownstone concluded that it agreed with other courts that had found that the phrase “legally obligated to pay”—at least as the phrase is commonly used in liability insurance policies—was ambiguous thereby triggering the well-worn rule that ambiguities in insurance policies are to be construed against the insurer. The key focus needed to be upon the exact wording of the covenant not to execute and whether it had the effect of completely releasing the insured from liability. However, where the settlement agreement spelled out that the parties shared an intent that the claimant would be able to satisfy the judgment from the insured’s insurance assets, the covenant would not act as a release without more.