Direct Action Statute Subject to Arbitration Clauses in New Jersey

Recently, in Crystal Point Condominium Association, Inc. v. Kinsale Insurance Company, A-76-20, the New Jersey Supreme Court held the plain language of the Direct Action Statute, N.J.S.A. 17:28-2, allows an injured party to file claims under this statute, and that claims pursuant to the terms of the policy are derivative, thus, in this case, subject to arbitration clauses within the policy.

The underlying suit arises from alleged construction and/or structural defects of a building in Jersey City, New Jersey. The building was managed by plaintiff, Crystal Point Condominium Association, Inc. (“Crystal Point”). Crystal Point, in-turn, filed an action against Nacamuli Associates, LLC and Hawke Inspections and Testing, LLC, however, these entities were insolvent. Thus, Crystal Point obtained default judgments against these entities. Crystal Point then pursued claims against Kinsale Insurance, who issued professional liability policies to Nacamuli Associates, LLC and Hawke Inspections and Testing, LLC, under the Direct Action Statute, N.J.S.A. 17:28-2. Kinsale Insurance argued against this action stating the Direct Action Statute was not satisfied as there was no proof of the insolvency or bankruptcy of Nacamuli Associates, LLC and Hawke Inspections and Testing, LLC. In the alternative, Kinsale Insurance moved to compel arbitration in compliance with the insurance policy which stated, ““[a]ll disputes over coverage or any rights afforded under this Policy . . . shall be submitted to binding Arbitration.”  The trial court ruled the Direct Action Statute was inapplicable for Crystal Point’s claims. The Appellate Court reversed the trial court decision and specifically noted the claims were not to be resolved via arbitration. The New Jersey Supreme Court granted review.

The Direct Action Statute, N.J.S.A. 17:28-2 allows a claimant to pursue an insurer if: (1) coverage for claims “against loss or damage resulting from accident to or injury suffered by an employee or other person and for which the person insured is liable”; or (2) coverage for claims “against loss or damage to property caused by animals or by any vehicle drawn, propelled or operated by any motive power, and for which loss or damage the person insured is liable.” However, in order to recover under this statute, the claimant must show: (1) first, injured parties have no rights under the policy until “execution against the insured is returned unsatisfied . . . because of the insolvency or bankruptcy” of the person insured; (2) second, any claim brought under the Direct Action Statute is a claim “under the terms of the policy.”

The New Jersey Supreme Court focused the analysis on the Legislative Intent of the statute and looked to the plain language which allows claims “against loss or damage resulting from accident to or injury suffered by an employee or other person and for which the person insured is liable.” The Direct Action Statute also provides, “a judgment creditor’s claim against the insolvent or bankrupt judgment debtor to be a claim ‘under the terms of the policy for the amount of the judgment in the action not exceeding the amount of the policy’; thus the claims are derivative and the claimant essentially “steps into the shoes of the assured” under the policy.  

From a defense perspective, it is beneficial for an insurance carrier to ensure the terms of the policy contain arbitration clauses to resolve claims.