In a published decision issued on March 4, 2021, New Jersey’s appellate court refused to compel an underlying tort liability plaintiff to submit its dispute against the insurer of two parties against whom it obtained default judgments to binding arbitration.
In Crystal Point Condo. Assoc., Inc. v. Kinsale Ins. Co., the plaintiff condominium association obtained substantial default judgments against two entities supposedly insured by the defendant insurer under an architects and engineers professional liability policy. The insurer refused to defend or indemnify either entity. After the plaintiff was unable to collect the judgments because of the putative insureds’ insolvency, it filed a coverage lawsuit against the insurer. The insurer successfully moved to dismiss the complaint in favor of arbitration based on a broad arbitration provision within its policy, which required all disputes over coverage or any rights afforded under the policy to be submitted to final and binding arbitration. The Appellate Division reversed and reinstated the plaintiff’s lawsuit.
The Appellate Division ruled that the plaintiff, as a judgment creditor of the insolvent insureds, could maintain an action against the insurer to recover the judgments against the insureds under New Jersey’s “Direct Action” statute, N.J.S.A. 17:28-2. As relevant to the decision, section 17:28-2 requires policies issued or delivered in New Jersey by insurers authorized to do business in the state to contain a provision stating that in case execution against the insured is returned unsatisfied in an action brought by the insured person because of the insolvency or bankruptcy, then an action may be maintained by the injured person against the insurer under the policy for the amount of the judgment. Policies issued in violation of the statute are “deemed” to include the required provision.
The court also ruled that—although the plaintiff was a third-party beneficiary of the policy by virtue of the rights granted it under the Direct Action statute, because the plaintiff was not a party to the insurance policy itself—it was not subject to the policy’s arbitration provision. Presumably, if the insureds were not insolvent and if they had assigned their rights against the insurer to the plaintiff, the plaintiff would have been subject to the arbitration provision.
Notably, the Appellate Division indicated that the insurer could have relied on its arbitration provision, had it attempted to resolve the coverage dispute directly with its putative insureds, rather than requiring the plaintiff to prosecute the coverage claims.
A key takeaway of the decision is that if an insurer wants to ensure that any coverage dispute will be submitted to final, binding arbitration, rather than litigated, and there is some indication that the insured may be insolvent or bankrupt, it should bring an arbitration proceeding at the outset, rather than waiting to see whether it will be the insured or the underlying plaintiff that will pursue coverage.
For more information or for immediate guidance, contact: