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Coverage Dispute Under NJ Direct Action Statute Must Be Arbitrated If Required By The Policy – Arbitration & Dispute Resolution

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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
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

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