OR Case Update: Oregon Court Clears the Path for Covenant Judgments

From the desk of Smith Freed Eberhard: In this game changing decision, the Oregon Supreme Court made two key decisions affecting insurance coverage for stipulated (covenant) judgments. It: (1) overruled the Stubblefield decision which for the past forty years held that a plaintiff cannot collect a covenant judgment from an insurer if its insured is no longer exposed to legal liability, and (2) clarified that the coverage assignment statute, ORS 31.825, allows an insured to assign bad faith claims but only when the insurer’s failure to settle results in an excess judgment, and only after the judgment is rendered. The Court did not address how anti-assignment provisions in insurance policies fit into this mix. Nonetheless, this and other recent court decisions indicate a trend towards liberalizing Oregon coverage law.

Claims Pointer: An insurer can no longer avoid liability for a covenant judgment against its insured by arguing that the plaintiff’s agreement not to collect the judgment from the insured eliminates the insurer’s legal obligations.

Brownstone Homes Condo. Assn. v. Brownstone Forest Hts., 358 Or 223 (2015).

Following a settlement strategy which is often used in the state of Washington, it is becoming more common in Oregon construction defect cases for the plaintiff homeowner to resolve its claims with the defendant contractor in exchange for a covenant judgment. This typically involves an agreement to do the following:

(1) Settle for some amount of money;
(2) The homeowner releases the contractor and agrees not to collect (covenants not to execute) the judgment from the contractor itself;
(3) The homeowner takes over the contractor’s negligence or “bad faith” claims against the contractor’s insurer (i.e. for denying coverage or refusing to defend); and
(4) The homeowner agrees to collect the judgment only against the insurer.

In the Brownstone case, this setup involved the Brownstone Condominium Association’s settlement of its...

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