Hello and Welcome to MacElree Harvey

Centreville, DE
Centreville, DE

5721 Kennett Pike
Wilmington, DE 19807

Hockessin, DE
Hockessin, DE

724 Yorklyn Rd #100
Hockessin, DE 19707

Kennett Square, PA
Kennett Square, PA

211 East State Street
Kennett Square, PA 19348

West Chester, PA
West Chester, PA

17 West Miner Street
West Chester, PA 19382

8:00am - 5:30pm
Opening hours Monday - Friday
Call Us Today
MacElree Harvey Offices
Home > New Jersey Supreme Court Clarifies Third Party Suits Against Insurers Under the Direct Action Statute

New Jersey Supreme Court Clarifies Third Party Suits Against Insurers Under the Direct Action Statute

By: Felix S. Yelin, Esquire*

Recently, the Supreme Court of New Jersey issued a decision clarifying whether and how third party beneficiaries with default judgments against insured entities may recover on those judgments against insurers.  The decision reinforced New Jersey’s strong policy favoring arbitration.

In Crystal Point Condo. Ass’n, Inc. v. Kinsale Ins. Co., No. 085606, 2022 WL 2793326 (N.J. July 18, 2022), a condominium association (“Association”) obtained default judgments and writs of execution against a structural engineering firm and a construction inspection company for professional negligence involving construction defects in the Association’s managed properties.  A single insurer (“Insurer”) covered both entities for such claims through a policy which contained an arbitration clause to resolve coverage disputes.

The Association sought to recover on the default judgments and brought a declaratory judgment and breach of contract action against the Insurer pursuant to New Jersey’s Direct Action Statute, N.J.S.A. 17:28-2 (“Statute”).  The Statute authorizes an injured victim with an unsatisfied judgment against an insolvent or bankrupt policyholder to file a direct legal action against the policyholder’s insurer under certain circumstances.  Those circumstances including proceeding under the terms of the policy.  The Court noted that the purpose of the Statute was for a third-party judgment creditor to directly pursue an insurer without the need for the insured party’s cooperation.

The Court determined that the Associations’ claims could be directly asserted against the Insurer pursuant to the Statute.  First, the Court clarified that the text of the Statute was broadly applicable to such claims and did not limit the Statute to motor vehicle or animal-related property damage claims. Second, the Court noted that the Association had sufficiently demonstrated that the two entities were insolvent or bankrupt.  Specifically, the Court held that proof of the writs of execution on the judgment being returned unsatisfied constituted prima facie evidence that the two insured entities were insolvent (the sheriff found that the two companies did not exist at their respective addresses).

Importantly, the Court also provided a partial win for insurers within New Jersey.  Specifically, the Court stated that the Association’s direct action under the Statute was subject to arbitration pursuant to the terms of the insurance policy issued to the insolvent, insured entities.  The Statute requires that a third party’s claim be brought under the terms of the policy.  While the Association did not sign off on the policy and its arbitration provision, it was nevertheless claiming rights that were purely derivative of the rights the insured could claim against the Insurer.  Consequently, permitting the Association to avoid arbitration would grant it greater rights than what the insured could have asserted under the policy and would contravene the Statute’s terms.

This decision reinforced New Jersey’s strong public policy favoring arbitration and made clear that an injured plaintiff’s rights under the Statute were purely derivative of the insured’s policy rights.  Therefore, to recover under an insured’s policy, the third-party beneficiary has to take the proverbial “good” with the “bad” under a policy, including subjecting itself to an express arbitration provision.


*The author was involved in the representation of the insurance entity at one point during the course of the appellate process.