A&T Siding, Inc. v. Capitol Specialty Ins. Corp.
358 Or. 32
Or.2015Background
- Brownstone Homes Condominium Association sued A&T Siding for construction defects; A&T was insured by Capitol Specialty.
- Brownstone and A&T executed a settlement: $2 million stipulated judgment against A&T, Brownstone covenanted not to execute against A&T, A&T assigned claims against Capitol to Brownstone, and mutual releases were exchanged (explicitly not intending to release Capitol).
- Brownstone served a garnishment writ on Capitol for $1.1 million (unpaid portion); Capitol moved for summary judgment arguing the covenant not to execute released its insured and thus released Capitol under Stubblefield.
- After the trial court agreed, Brownstone and A&T executed an addendum narrowing the no-execution covenant, removing the assignment, and requiring A&T to sue Capitol on Brownstone’s behalf; A&T then sued Capitol in state court (removed to federal court).
- The federal district court concluded the original agreement had unconditionally released A&T (thereby releasing Capitol), and the addendum only created a new contractual obligation by A&T that was not covered by the insurance policy; A&T appealed and the Ninth Circuit certified the question to the Oregon Supreme Court.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| May parties amend a settlement to restore insurer liability eliminated by an earlier covenant not to execute? | Parties intended original deal to permit recovery from insurer; addendum reflects original intent and thus revives insurer duty. | Original settlement unconditionally released insured (and thus insurer); addendum cannot retroactively undo that without rescission or judicial reformation. | No; parties cannot effectuate reformation here to revive insurer liability where alleged mistake was merely a mistaken prediction of the legal consequences of the written agreement. |
| Is private (nonjudicial) reformation available to undo the legal effect of the original settlement? | Impliedly yes; parties negotiated the addendum to correct the mistake. | Reformation is an equitable, judicial remedy requiring antecedent agreement and court action. | Court need not decide permissibility of private reformation but holds reformation requirements were not met here. |
| Did the addendum create covered insurance liability (relation-back) rather than a new contractual obligation? | The addendum relates back to original covered loss; therefore Capitol’s policy covers it. | The addendum created a new contractual obligation assumed by A&T, which is not a covered ‘‘property damage’’ or is excluded as assumed liability. | The addendum did not relate back; it created a new contractual obligation that did not revive insurer coverage under the theories argued. |
| Was the alleged mistake sufficient to warrant reformation? | Parties mistakenly misunderstood legal effect of their written agreement and thus are entitled to reformation. | Mistake was only a misprediction of how courts would construe the agreement, which does not justify reformation. | Held that a mistake as to future judicial construction is not a ground for reformation; required elements (antecedent agreement, drafting mistake) were not shown. |
Key Cases Cited
- Stubblefield v. St. Paul Fire & Marine, 267 Or 397 (1973) (settlement with covenant not to execute can eliminate insurer liability derived from insured)
- Lancaster v. Royal Ins. Co. of America, 302 Or 62 (1986) (Stubblefield rule applies only when release is unambiguous and unconditional)
- Terrain Tamers v. Insurance Marketing Corp., 210 Or App 534 (2007) (covenant not to execute while insurer action pending is not unconditional under Stubblefield)
- Jensen v. Miller, 280 Or 225 (1977) (elements required for reformation: antecedent agreement, mutual or qualifying unilateral mistake, and lack of gross negligence)
- Richmond v. Ogden Street Ry. Co., 44 Or 48 (1903) (distinguishes mistakes of law about legal effect from drafting mistakes supporting reformation)
- Harris Pine Mills v. Davidson, 248 Or 528 (1968) (reformation appropriate where mistake in understanding underlying agreement led to defective written instrument)
- Ray v. Ricketts, 235 Or 243 (1963) (reformation and equitable relief must be proven by clear and convincing evidence)