The Direct Action Statute and Arbitration

Crystal Point Condominium Ass’n v. Kinsale Ins. Co., 466 N.J. Super. 471 (App. Div. 2021). Plaintiff filed a construction defect litigation regarding balconies and slabs at plaintiff’s 42-story condominium building. Among the defendants were the structural engineer for the construction of the building and a third party inspector of the balconies and slabs. Neither defendant filed an Answer, and plaintiff ultimately obtained default judgment against both of them. Plaintiff had writs of execution issued, but the writs were not returned by the time this appeal was briefed.

Plaintiff turned to defendant, an excess and surplus lines insurer, whom plaintiff alleged had insured both defendants at relevant times. Defendant’s policies of insurance did not relieve defendant of its obligations upon the bankruptcy or insolvency of its insureds. Plaintiff sought a declaratory judgment requiring defendant to pay the judgments against its insureds.

But defendant’s policies contained arbitration provisions. Defendant thus moved to dismiss the case in favor of arbitration. Plaintiff then asserted the direct action statute, N.J.S.A. 17:28-2, which allows an injured person to sue an insurer directly under its insured’s policy where an execution against the insured is returned unsatisfied due to bankruptcy or insolvency.

The Law Division granted defendant’s motion to compel arbitration. That court found the direct action statute inapplicable, since there was no evidence that the insureds were bankrupt or insolvent. And plaintiff was required to go to arbitration as the policy under which it sought to sue required because, the Law Division said, “must take the sweet with the sour.”

Plaintiff appealed. In an opinion by Judge Suter that applied de novo review, the Appellate Division reversed.

During the pendency of the appeal, the writs of execution against the defaulted parties were returned unsatisfied. “The return of an ‘unsatisfied execution is prima facie evidence’ of the insolvency of the insured,” Judge Suter said, quoting a 1936 Errors and Appeals decision. There was no contrary evidence, so the insureds were deemed insolvent.

Judge Suter then went on to hold that arbitration was not required. Though arbitration is “a favored means of dispute resolution,” there was no “mutuality of assent,” and plaintiff “was not a signatory of the insurance contract.”

Though plaintiff was a third-party beneficiary of the insurance policies, the Appellate Division rejected the “take the sweet with the sour” rationale. Rather, Judge Suter stated, after a lengthy discussion, that the panel was “not satisfied that the third-party beneficiary status accorded to plaintiff by the direct action statute means binding arbitration is a predetermined sequela of that status when the claim is considered against the canvas of our arbitration jurisprudence.” The Appellate Division reinstated the case and remanded for further judicial proceedings.