Oregon Supreme Court Bars Plaintiff From Executing on Covenant Judgment Against the Defendant’s Insurer

The Oregon Supreme Court recently answered a question certified to it by the Ninth Circuit Court of Appeals, which asked whether a settlement agreement that released an insured from liability could be amended to revive the liability of the insured so that the plaintiff could seek recovery from the insurer. The Oregon Supreme Court concluded that, based upon the theory presented by the plaintiff, the settlement agreement could not be amended. A&T Siding v. Capitol Specialty Insurance Corp., ___ Or. ___ (Oct. 8, 2015)

The case arose out of a lawsuit by the Brownstone Homes Condominium Association related to construction defects in the condominium complex, which Brownstone alleged were caused in part by A&T Siding. Capitol Specialty and Zurich insured A&T for the relevant time period. Capitol initially defended A&T, but withdrew its defense when it concluded that the damage alleged by Brownstone was not covered.

Brownstone later settled with A&T via a “covenant judgment.” Under the agreement, judgment would be entered against A&T for $2 million and Zurich would pay $900,000 of that judgment. A&T agreed to assign its rights against Capitol to Brownstone, and Brownstone covenanted not to execute the judgment against A&T or its assets. Instead they agreed that Brownstone would be entitled to seek recovery of the unexecuted portion of the judgment from Capitol. The parties also agreed to release each other from “all past, present and future claims” arising out of the dispute.

Brownstone then began garnishment proceedings against Capitol for the unpaid portion of the judgment. Capitol moved for summary judgment, arguing that because the settlement agreement released A&T from all liability, Capitol was likewise released from liability. The trial court agreed and entered judgment in Capitol’s favor. The court relied in part upon its decision in Stubblefield v. St. Paul Fire & Marine, 517 P.2d 262 (1973), which also involved a covenant judgment. The settlement agreement in Stubblefield excused the insured from any obligation to pay the judgment, and the insurance policy limited the insured’s coverage to sums the insured was “legally obligated” to pay. The court therefore held the underlying plaintiff had acquired no enforceable claims or rights against the insurer under the assignment.

Following the entry of judgment, Brownstone and A&T executed an “addendum” to their settlement agreement. Among other things, the addendum eliminated the original assignment to Brownstone of A&T’s claims and required A&T to pursue those claims itself under Brownstone’s direction and at Brownstone’s expense. The addendum also replaced the original unconditional release of all parties with a release only of Zurich.

A&T then sued Capitol and the case eventually found its way to the Ninth Circuit, which certified the following question to the Oregon Supreme Court:

The parties’ original settlement agreement, under which [Brownstone] released A&T from liability and signed a covenant not to execute the stipulated judgment against A&T, was construed pursuant to Stubblefield * * * to also release A&T’s insurer, [Capitol] from liability. The parties to the agreement assert that such a construction is contrary to the parties’ intent. Under Oregon law, may the parties amend their settlement agreement to reflect their original intent, and thereby restore the insurer’s duty to provide coverage for A&T’s resulting liability to the extent its policy provides coverage for the loss alleged by Brownstone?

The Oregon Supreme Court accepted the certified question. Capitol argued that Brownstone originally released A&T from any liability and that the addendum they created could not undo that release in the absence of the trial court rescinding or reforming the settlement agreement. A&T argued that it and Brownstone did not intend for the language in the original settlement agreement to have the legal effect the trial court gave it. It further argued that the parties reformed the original settlement agreement when they created the addendum, even though they did not call on the equitable authority of a court to reform the agreement. A&T therefore argued that the addendum should relate back to the original settlement agreement.

The Oregon Supreme Court rejected A&T’s argument. It did not reach the question of whether A&T and Brownstone could privately reform the contract without court approval. Instead it concluded among other things that A&T and Brownstone were not entitled to the equitable remedy of reformation based on A&T’s “mistake of law” argument that the language in the original agreement had unintended consequences. Accordingly, the insured and plaintiff could not reform the original settlement agreement.

The court left open the possibility that other legal or equitable theories not argued by the parties might justify treating the addendum as relating back to the original settlement agreement, though it did not explain what those theories might be. It is clear, however, that Stubblefield remains the law in Oregon. Insurers faced with a settlement agreement and covenant judgment in Oregon should always examine the settlement documents carefully to determine whether the agreement releases the insured from all liability. In such a case the insurer may have a strong argument that it is not obligated to fund the settlement.

New Jersey Federal Court Permits Reformation Over Additional Insured’s Objection

The United States District Court for the District of New Jersey recently granted summary judgment to an insurer seeking to reform an aircraft fleet insurance policy based on mutual mistake of the parties to the contract.  Illinois National Insurance Company v. Wyndham Worldwide Operations, Inc., 2015 U.S. Dist. LEXIS 9468 (D.N.J. Jan. 28, 2015).

Illinois National issued a series of policies to an aircraft management company, Jet Aviation International, Inc., from 2004 to 2008.  Jet managed and operated Wyndham’s aircraft fleet and provided flight planning, staffing, and maintenance.  Under its agreement with Wyndham, Jet would arrange for a substitute airplane from its own fleet if necessary for a particular flight.  Jet also promised to maintain insurance covering Wyndham’s aircraft.

INS BLOG_jet aviationThe Illinois National policies afforded blanket coverage for aircraft operated by or used at the direction of Jet.  From 2004 to 2007, the policies included a “non-owned” aircraft exclusion which meant that Wyndham could not seek coverage for damages in connection with an aircraft it did not own, and where Jet had no involvement.  In 2008, Jet requested a small modification to the policy which had the unintended effect of expanding coverage to apply to Wyndham’s “non-owned” aircraft, even without a connection to Jet.

Two Wyndham employees were killed in a 2008 accident involving a rented airplane, neither owned by Wyndham nor operated by Jet under the management agreement.  Wyndham maintained separate insurance covering its use of non-owned aircraft without Jet’s involvement, and that insurer defended and settled the claims arising from the accident.  Nevertheless, Wyndham contended that the 2008 Illinois National policy also applied based on its terms.  Illinois National filed this coverage action seeking a declaration of no coverage or, in the alternative, equitable reformation based on mutual mistake.

The court initially granted a motion to dismiss Illinois National’s complaint, but the Third Circuit reversed.  On remand (and before a different judge), the court considered the issues through cross-motions for summary judgment.  To justify reformation, Illinois National had to demonstrate: (1) at the time of the 2008 modification, Jet did not intend to grant Wyndham coverage for non-owned aircraft unrelated to Jet; (2) Illinois National shared this intent; and (3) the 2008 policy did not reflect their agreement.

The court weighed various factors to determine whether a shared intent existed.  These factors included evidence of the reason for the change, prior policy terms, Wyndham’s reasonable expectations, the substance of the Jet/Wyndham agreement, the amount of premium, and the alleged absurdity of Wyndham’s interpretation.  The court noted that Wyndham’s interpretation of the exclusion would render it meaningless.  Thus, on balance, the factors reflected a shared intent which the 2008 policy did not express.  The court rejected Wyndham’s attempt, as an interloper, to dictate the contracting parties’ intent.

Finally, the court concluded negligence, even gross negligence, of Illinois National or Jet did not bar reformation where there was a meeting of the minds not expressed in the policy.  Nor did the fact that the accident had already occurred preclude post-loss reformation absent a showing of any prejudice.