The Oregon Supreme Court Overrules the Stubblefield Rule Regarding an Insured’s Ability to Assign Insurance Rights

Oregon has long had a very interesting rule called the Stubblefield Rule, derived from the case of Stubblefield v. St. Paul Fire & Marine Ins. Co., 267 Or. 397 (1973). In Stubblefield, the Oregon Supreme Court held that when an insured enters into a stipulated judgment with a covenant not to execute, the insured is no longer “legally obligated to pay” for purposes of triggering coverage under a CGL policy. Under Stubblefield, a stipulated judgment with a covenant not to execute terminates the insurer’s obligations under the policy to the insured, and, in turn, to the assignor/claimant. The Stubblefield Rule has caused parties to a stipulated judgment to be extremely careful to make sure that the insured’s liability was not eliminated.

Earlier this year, in A&T Siding v. Capitol Specialty Ins. Corp., ___ Or. ___ (Oct. 8, 2015), the Oregon Supreme Court also held that parties to a stipulated settlement with an agreement not to execute could not amend the settlement agreement to revive the insured’s liability for purposes of seeking insurance coverage. Our Capitol Specialty discussion can be found here. As we indicated in our A&T Siding blog post, the Stubblefield Rule was alive and well in Oregon, and we recommended that insurers facing a settlement agreement and covenant judgment should examine the settlement documents carefully to determine whether the agreement released the insured from all liability.

Now, however, the Stubblefield Rule is no longer the law in Oregon. In Brownstone Homes Condo. Assoc. v. Brownstone Forest Heights, LLC, et al., the Oregon Supreme Court acknowledged that Stubblefield “was wrongly decided.” The Court noted that its reasoning in Stubblefield was sparse, the decision was “unsupported by any explanation or analysis,” and the Court neglected to examine the policy language. The Court observed that the majority of jurisdictions have held that “when a covenant not to execute is given in the context of a settlement agreement for valuable consideration (specifically, an assignment of claims), it is a contractual promise not to sue the defendant on the judgment, not a release or extinguishment of the defendant’s legal obligation to pay it.” The Oregon Supreme Court concluded that Stubblefield “erred when it concluded that a covenant not to execute obtained in exchange for an assignment of rights, by itself, effects a complete release that extinguishes an insured’s liability and, by extension, the insurer’s liability as well.”

Nevertheless, insurers should remain mindful of ORS 31.825, which sets forth precise timing requirements to effect a proper assignment of rights against an insurer. Under ORS 31.825, the underlying parties must first reach a settlement, then facilitate entry of judgment, and only then can a valid assignment take place. Insurers should take care to confirm the insured’s compliance with the statute when evaluating an assignment of rights to insurance proceeds.