In Crystal Point Condominium Association, Inc. v. Kinsale Insurance Company (A-76-20/085606) (Decided July 18, 2022), the Supreme Court of New Jersey held that a condominium association must use arbitration to pursue its insurance coverage claims seeking to recover default judgements against two contractors. According to the court, Crystal Point Condominium Association can rely on the Direct Action Statute; however, because its claim is “purely derivative” of the contractors’ rights under the policies, it is bound by their arbitration provisions.
Facts of Crystal Point Condominium Association, Inc. v. Kinsale Insurance
In a construction defect case, plaintiff Crystal Point Condominium Association (Crystal Point) obtained default judgments against two entities that it contends are insolvent — Nacamuli Associates LLC, a structural engineering firm, and Hawke Inspections and Testing LLC, a construction inspection company. Crystal Point alleges that defendant Kinsale Insurance Company (Kinsale) insured the two entities for the construction claims brought here. It relies on insurance policies issued by Kinsale, which both contained an arbitration agreement providing in part that “[a]ll disputes over coverage or any rights afforded under this Policy . . . shall be submitted to binding Arbitration.”
After Crystal Point failed to recover on the default judgments, it brought a declaratory judgment and breach of contract action against Kinsale pursuant to the Direct Action Statute, demanding that Kinsale satisfy the judgments. The Direct Action Statute authorizes an injured claimant holding an unsatisfied judgment against an insolvent or bankrupt policyholder to file a direct action against an insurer in certain settings. Under the statute, such actions must proceed “under the terms of the policy for the amount of the judgment in the action not exceeding the amount of the policy.”
Kinsale argued that the Direct Action Statute did not govern Crystal Point’s claims. It asserted that even if the Direct Action Statute were held to apply, the statute’s provision that the terms of the policy govern the action mandates that the parties’ dispute be resolved in arbitration, not in a court proceeding.
The trial court concluded that the Direct Action Statute did not apply. It granted Kinsale’s motion to compel arbitration and dismissed Crystal Point’s complaint. The Appellate Division reversed, authorized Crystal Point to assert claims against Kinsale under the Direct Action Statute, and ruled that the parties’ dispute was not arbitrable.
NJ Supreme Court Decision in Crystal Point Condominium Association, Inc. v. Kinsale Insurance
The New Jersey Supreme Court unanimously reversed, ruling that Crystal Point must pursue its claims via arbitration. “We concur with the Appellate Division that Crystal Point may assert direct claims against Kinsale pursuant to the Direct Action Statute in the setting of this case,” Justice Anne Patterson wrote on behalf of the court. “Based on the plain language of N.J.S.A. 17:28-2, however, Crystal Point’s claims against Kinsale are derivative claims, and are thus subject to the terms of the insurance policies at issue, including the provision in each policy mandating binding arbitration of disputes between Kinsale and its insureds. Crystal Point’s claims against Kinsale are therefore subject to arbitration.”
The New Jersey Supreme Court first found that Crystal Point had satisfied the requirement that it present prima facie evidence of the insolvency or bankruptcy of the parties that it claims were insured by Kinsale, and its claim under the statute may proceed. It then turned to whether Crystal Point’s claim pursuant to the Direct Action Statute is subject to the arbitration provision in the relevant policies that Kinsale issued, concluding that the parties’ disputes must be submitted to binding arbitration in accordance with the arbitration provisions.
In support, the New Jersey Supreme Court noted that the Direct Action Statute defines 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.” In this case, it found that one of the “terms of the policy” at is the arbitration clause, whose broad language mandates arbitration of any action brought by Nacamuli or Hawke against Kinsale.
Following the Appellate Division’s decision “would grant Crystal Point greater rights than the rights that Nacamuli or Hawke could have asserted against Kinsale,” Justice Patterson explained. “Were we to concur with the appellate division that in contrast to the other provisions of the insurance policies, the arbitration clause is somehow unenforceable in Crystal Point’s action, we would contravene the direct action statute’s plain terms.”