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Coverage Dispute Under NJ Direct Action Statute Must Be Arbitrated if Required by the Policy

July 20, 2022

On July 18, 2022, the New Jersey Supreme Court issued a decision interpreting New Jersey’s Direct Action Statute, N.J.S.A. 17:28-2, and held that a claimant that pursues a cause of action directly against a carrier for coverage under the Direct Action Statute must abide by the terms of the policy with the insured, including a binding arbitration provision. The decision is important in that it signals the Court’s willingness to enforce appropriate arbitration provisions in insurance policies. The case is Crystal Point Condo. Assoc., Inc. v. Kinsale Ins. Co., A-76-20, __ N.J. __ (July 18, 2022).

In this case, the plaintiff Crystal Point Condominium Association obtained two default judgments against defendants in a construction defect lawsuit. It then filed a separate lawsuit against the insurers of those two defendants under the Direct Action Statute. Kinsale moved to dismiss the lawsuit because Crystal Point did not show that either of the defendants were insolvent or bankrupt, as required by the Direct Action Statute. In the alternative, Kinsale argued that its policy contained a provision that required any dispute under the policy to be submitted to binding arbitration.

The Supreme Court first held that the Direct Action Statute applied to the Association’s claim for property damage encompassed by the default judgments against the defendants in the construction defect lawsuit, and was not limited to motor vehicle or animal losses as argued by Kinsale.

Next, the Court held that the Association’s proof that writs of execution against the defendants were returned unsatisfied constituted prima facie evidence of insolvency under the Direct Action Statute. Because Kinsale offered no evidence to rebut the evidence of the insureds’ insolvency, the Court held the Association could proceed under the Direct Action Statute.

Most importantly, the Court held that the arbitration provision in the Kinsale policy was enforceable against the Association. The Court ruled that because the claim under the Direct Action Statute is governed by the terms of that statute, which defines a judgment creditor’s claim by reference to a claim “under the terms of the policy” issued to the insured, all of the terms of the policy apply to such a claim, including an otherwise enforceable arbitration provision. The Court disagreed with the Appellate Division’s conclusion that the Association, as a non-signatory to the policy, was not bound to arbitrate absent evidence that the insureds and Kinsale expressed the intent that judgment creditors would be subject to the arbitration provision. The Court instead concluded that under the Direct Action Statute’s plain language, the Association’s rights are “purely derivative” of the rights of the insureds under the policy, including the mandatory arbitration provision, and could be no greater than the insureds’ rights under that same policy.

The Crystal Point decision represents another recent example of the willingness of New Jersey courts to enforce appropriate arbitration provisions, and also confirms that a claimant’s rights under the Direct Action Statute can be no greater than the rights of the insured under the applicable policy.

If you have any questions about this Alert, please contact any member of the Insurance Group below.

Brian E. O'Donnell

Lance J. Kalik

Glenn D. Curving

Michael P. O'Mullan

Anthony J. Zarillo, Jr.

Tracey K. Wishert

Michael J. Rossignol

Maura C. Smith

Jeffrey M. Beyer

Peter M. Perkowski, Jr.

Caroline Brizzolara

Anne M. Mohan

Marcia Miller Wefelmeier

Brooks H. Leonard

Casey A. Boyle

Craig M. Terkowitz

Cara Vecchione

Jeffrey A. Beer, Jr.

Our Team

Jeffrey M. Beyer

Jeffrey M. Beyer
Partner

Glenn D. Curving

Glenn D. Curving
Partner

Lance J. Kalik

Lance J. Kalik
Partner

Brian E. O'Donnell

Brian E. O'Donnell
Partner

Michael P. O'Mullan

Michael P. O'Mullan
Partner

Peter M. Perkowski, Jr.

Peter M. Perkowski, Jr.
Partner

Michael J. Rossignol

Michael J. Rossignol
Partner

Maura C. Smith

Maura C. Smith
Partner

Tracey K. Wishert

Tracey K. Wishert
Partner

Anthony J. Zarillo, Jr.

Anthony J. Zarillo, Jr.
Partner

Caroline Brizzolara

Caroline Brizzolara
Of Counsel

Jeffrey A. Beer, Jr.

Jeffrey A. Beer, Jr.
Counsel

Casey A. Boyle

Casey A. Boyle
Counsel

Brooks H. Leonard

Brooks H. Leonard
Counsel

Anne M. Mohan

Anne M. Mohan
Counsel

Craig M. Terkowitz

Craig M. Terkowitz
Counsel

Cara Vecchione

Cara Vecchione
Counsel

Marcia Miller Wefelmeier

Marcia Miller Wefelmeier
Counsel

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