by Megan L. Ferris and Kristin M. Welsh

The Oregon Supreme Court in Brownstone Homes Condo. Assn. v. Brownstone Forest Heights, LLC, and Capital Specialty Insurance Co., 358 Or 223 (2015) recently overruled more than forty years of precedent (Stubblefield v. St. Paul Fire and Marine Ins. Co., 267 Or 397 (1973)). With the Brownstone decision, Oregon now follows the majority rule which allows insured-defendants to enter into “covenant judgments” wherein the insured-defendant agrees to allow plaintiff to enter a judgment against him in excess of the policy limits and in exchange the plaintiff promises to pursue the judgment only against insurance proceeds.

Prior to the Court’s decision in Brownstone, “covenant judgments” might not be enforceable. The long standing Stubblefield rule held that when plaintiffs gave defendant-insureds a covenant not to execute, it rendered the insured no longer “legally obligated to pay.” If the insured’s policy only covered sums that the insured is “legally obligated to pay,” then the insurer’s obligation vanished when the plaintiff and insured enter the covenant. Most “covenant judgments” assign plaintiffs the insured’s right to recover the excess judgment from their insurer in exchange for the covenant not to execute directly against the insured-defendant. Assigning a plaintiff valuable rights against the insurer was not impossible in the Stubblefield era; however, a plaintiff had to obtain a judgment against the insured-defendant prior to executing the covenant. If the parties entered the covenant first, the assignment had no value. In the Stubblefield era, any slight mistake in the covenant’s language or timing could effectively destroy the plaintiff’s claim against the insurer.

The Court in Brownstone held that Stubblefield was wrongly decided. It held that the insurance company’s obligation to pay under the insurance policy is a contractual agreement separate from the insured’s obligation to pay on a judgment. The Court noted that a covenant not to execute does not constitute a release. The insured is still legally obligated even after the covenant is executed. The Court held that a covenant is only a promise on behalf of the plaintiff not to enforce the insured’s legal obligation to pay. Because the covenant does not constitute a release, the Brownstone decision holds that plaintiffs maintain rights against insurers provided in exchange for their covenant not to execute. The liability of the insurer is not extinguished by the covenant.