359 P.3d 1178
Or.2015Background
- Brownstone Homes sued general contractor and subcontractor 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, covenant not to execute against A&T, assignment of A&T’s claims against Capitol to Brownstone, and mutual releases (explicitly stating no release of claims against Capitol as insurer).
- Brownstone attempted to garnish $1.1 million unpaid portion from Capitol under ORS 18.352; Capitol moved for summary judgment, relying on Stubblefield to argue the covenant not to execute released the insurer as well.
- The state trial court granted summary judgment for Capitol; Brownstone and A&T then executed an addendum narrowing the covenant not to execute, removing the assignment, and requiring A&T to sue Capitol for Brownstone’s benefit.
- A&T sued Capitol in state court (removed to federal court). The federal district court held the original settlement unconditionally released A&T (and thus Capitol) and that the addendum created only a new contractual obligation not covered by the policy.
- Ninth Circuit certified whether Oregon law permits parties to amend a settlement to restore insurer liability; Oregon Supreme Court answered that reformation was unavailable because the parties’ mistake was a misprediction of legal effect, not a drafting error.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether parties may amend their settlement to revive insurer liability | The addendum effectuates the parties' original intent that the insurer pay; the amendment should relate back and restore coverage | The original unconditional covenant released insured and insurer; the addendum only created a new contractual obligation not covered by policy; reformation/rescission required to undo release | Reformation unavailable: parties’ error was a mistaken prediction of legal effect, not a drafting mistake; the addendum cannot retroactively revive insurer liability |
| Whether reformation (private or judicial) can be used here | Parties effectively reformed the agreement by mutual consent via addendum to reflect original intent | Reformation requires antecedent agreement and a drafting mistake; mistaken legal prediction is insufficient | Reformation requires an antecedent agreement and mistake in writing; mistake of law as to legal consequences does not justify reformation |
| Whether the addendum created a covered loss under the policy | The assumed liability under the addendum relates back to the underlying damage and is covered | Any obligation assumed by contract is a new liability and falls outside coverage and policy exclusions | The addendum-created obligation is a new contractual liability and not covered under the policy as ‘‘property damage’’ caused by an occurrence, and may be excluded as assumed liability |
| Whether courts will enforce amendments that undermine prior final judgments | Amendment reflects parties’ intent and should be honored; no inequity to third parties | Courts should not allow amendments to circumvent finality of valid court orders and judgments | Courts will not permit equitable remedies that would unfairly impair finality or injure innocent third parties; amendment cannot circumvent final judgment without proper relief |
Key Cases Cited
- Stubblefield v. St. Paul Fire & Marine, 267 Or 397 (1973) (settlement with covenant not to execute can prevent assignee from enforcing insurer claim)
- Lancaster v. Royal Ins. Co. of America, 302 Or 62 (1986) (Stubblefield applies only when release/covenant is unambiguous and unconditional)
- 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 as to legal effect of contract actually made from mistakes in reducing agreement to writing)
- Harris Pine Mills v. Davidson, 248 Or 528 (1968) (reformation appropriate where drafting mistake caused by misunderstanding of underlying agreement’s effect)